If our low inventory market continues through this summer, sellers may have a slight edge over buyers. Still, our strong local economy and low interest rates are driving first-time buyers into the market. To stand out as a first-time buyer this summer, follow these eight tips from Edina Realty senior vice president and regional manager Marge Kane.
1. Understand and clean up your credit
Your financial status, which includes your savings, debt and credit, is arguably the most important variable in the home buying equation. As a first-time buyer, you should fiercely protect your finances and credit in the months leading up to buying a home.
The Federal Trade Commission mandates that the three nationwide credit reporting companies offer you a full, free credit report every 12 months. Get started here, and then work to dispute any inaccuracies you find in your reports.
Remember, the easiest way to maintain a high credit score is to pay your bills on time, so set up a recurring schedule or calendar alerts to ensure you don’t have any late payments.
2. Improve your debt-to-income ratio
Cleaning up your credit is one way to improve your status in the eyes of mortgage lenders. When you apply for a loan, your mortgage loan officer will take into account your debt-to-income ratio, which measures your ability to pay off monthly debt obligations.
The back-end ratio adds together your housing expenses—comprised of mortgage principal and interest, taxes and insurance—as well as all your other monthly debt obligations like credit card bills, student loans and car payments. In general, lenders prefer that your back-end ratio be between 36-42 percent of your gross monthly income.*
Remember, financial institutions look favorably on those who have demonstrated they are able to repay expenses. For financial advice on how to cut down your debt-to-income ratio or achieve your home buying goals, speak with your mortgage loan officer, who is always there to guide you.
3. Determine what you have for a down payment
It can be tempting to clean out your entire savings account for your down payment, as a higher down payment can increase your buying power. However, it’s important that you strike a healthy balance when putting money down on your house.
Financial experts recommend that you have six months of living expenses put aside in case of emergency, and you’ll also want a small nest egg for the expenses that come with being a homeowner (think: a lawnmower and small furniture upgrades).
Don’t forget that you can get creative with down payments, too. Some loans may have down payment assistance available and family members are also allowed to gift you funds that can be used for a down payment. Your mortgage loan officer will be able to help you determine how to document gift funds.
4. Get pre-approved for the best rate possible
Once your credit, debts and down payment are in order, it’s time to get pre-approved for a mortgage. Together with your mortgage loan officer, you can determine the loan type and the amount you qualify for.
A mortgage pre-approval is critical for navigating today’s low inventory market, as it shows sellers that you are a serious buyer who will be backed by a credible lender at the closing table.
The pre-approval is also when you’ll see how credit score and payment history has impacted your interest rate. A lower mortgage interest rate means more buying power and of course, less interest paid over time. This recent infographic shows that saving a half percentage point on a $200,000 mortgage can mean a total savings of $23,000 over the life of the loan.
5. Offer earnest money
As part of your offer, you will submit an earnest money deposit. This deposit is generally put into an escrow account of the listing broker, where it is held until closing. The deposit is then applied to the closing costs. Earnest money is an indication to the seller that you are committed to buying their home and a more significant deposit can indicate a higher level commitment. Earnest money deposits include a contingency clause, and if the deal falls through due to a failed contingency, you’ll get your deposit back. Talk with your REALTOR® to create the best possible contingency statement for your bid.
6. Offer to expedite your inspection
Historically, buyers have promised an inspection within three days, and have taken a few more days to mull over the results or request repairs. As such, one way buyers can stand out without offering any extra money is to promise an expedited inspection timeline.
When you submit your offer, promise a next-day inspection that you will personally attend, and then promise to return your feedback to the seller that day. The seller will have peace of mind knowing that even in the deals fall apart, they could still have other offers to consider. We have seen many local Edina Realty agents and homebuyers use this strategy to win bids in this summer’s low inventory market.
7. Promise an optimum closing date
As a first time homebuyer, you may have more flexible timelines than the buyers you are competing against. Take advantage of this by offering a closing date that matches the sellers’ best interest. It may be tempting to offer the fastest closing date possible but some sellers—like those moving cross-country, or those waiting on their new construction home to be finished—may have a longer timeline in mind. Your Realtor can help you match the timing that is most beneficial to the home seller, which is a great negotiation strategy.
How to take the first step
As you can see, there are many ways—both financial and personal—to put your best foot forward making an offer on your first home in Minnesota or western Wisconsin. But the first step is to find a local Realtor who can be with you for the entire process.
We have more than 2,300 community Realtors who do just that for first-time buyers every day. Call, chat or email today to get connected with an agent who’s right for you.
*DISCLAIMER: There is NO WARRANTY, expressed or implied, for the accuracy of this information or its applicability to your financial situation. Please consult your own financial advisor or Mortgage Loan Officer to determine your individual buying power.