Before the Agent Talk: A Five-Year Timeframe for Hopeful Real Estate Clients

The idea of buying a new home can conjure up plenty of excitement. When the option is presented, suddenly buyers look around at what they have an envision how life could be different with newer appliances, a larger yard to play in and up-to-date everything. As such, there’s often a push to get the process completed as quickly as possible. While short sales do happen, the reality is that there is typically a defined timeline to the home-buying journey, and it might not be as short as wishful clients would like.

Still, by taking their time to navigate the steps thoroughly and correctly, agents can help lead their clients as they make one of the largest purchases of their life. To this end, it’s helpful to walk through the five main steps so both parties can be as prepared as possible once the ball gets rolling. After these are completed, agent conversations can begin and the real fun can start.

Getting Credit Scores in Order

Most clients who walk into a real estate office might be surprised that, if their credit is sub-par, the process will be lengthier and more time-consuming. Though there are loan options available for those with poor credit, they often come with higher interest rates and a slew of tacked-on fees to cover the lending agency’s liability.

Ideally, those interested in buying or building a home will begin taking steps to build up their credit about five years before they actively and seriously start looking on the market. As a rule of thumb, lenders will give their lowest rates to persons with credit scores at 740 or above. While this might be a pipe dream for some buyers, it’s not unachievable. It requires adopting a strict routine and sticking to it. It means paying bills in full and on time, paying down debt, and resisting the urge to swipe a credit card at every turn.

Clients can request a free copy of their credit scores from each of the major reporting bureaus once every year. If any details look incorrect, they should take action immediately to help repair any damage that may have been done to their score without their knowledge. Then, if their number isn’t where it needs to be, they can adopt corrective measures to help get their finances back on track. Yet, this doesn’t happen overnight. That’s why a five-year cushion is ideal if there are any credit setbacks that require remediating.

Saving Up for the Down Payment

To achieve the most favorable interest rates and avoid paying private mortgage insurance (PMI), home buyers will typically need to pay 20% of the property’s price up front. This down payment is essential, though it can often set unexpecting clients back if they aren’t prepared for the expense.

About three years before buyers plan to move, they should take a serious look at their savings. Do they have enough to apply that 20% or will it require saving for a little longer? Unless the move is necessary for professional or personal reasons, it’s often worth it to continue saving as long as possible to mitigate the financial burden that a mortgage can bring.

Of course, if buyers do need to access those funds as quickly as possible, they may be looking to sell their home and buy another in the same general timeframe. While this process can be stressful, it can be done. You can read more here on what to expect during this time and how to make the journey more manageable.

There are certain loan programs wherein buyers don’t have to put down the usual 20% down payment. A loan secured through the Federal Housing Administration (FHA), for instance, only carries a 3.5% down payment requirement, given that the buyer’s credit score is above 580. Moreover, regardless of the type of loan secured, there will also be closing costs to account for. Thus, it’s wise to start saving a few years before beginning this process to make sure clients aren’t sticker-shocked when it’s time to sit down with the realtor.

Determining Affordability and Narrowing Down Options

About one year before the official search begins, clients should determine their debt-to-income ratio. In other words, how much do you make each month versus how much you spend on necessary bills and other living expenses? Knowing the answer to this question can help buyers determine the size of mortgage they can comfortably take on.

In general, financial institutions will recommend that a buyer’s debts not equal more than 43% of his gross monthly earnings, which he receives before taxes are extracted.

For instance, if a buyer calculates that his debt-to-income ratio allows him to spend $1,000 on a mortgage, then a home priced above this range is out of the question. This is how thousands of available properties in an area are narrowed down into a select handful that meet certain buyer criteria.

The Pre-Approval Process

One month before preparing to buy, clients should meet with their bank or lending institution and learn what size of loan they’re pre-approved for. This can help them narrow down market options and make the buying journey as quick and seamless as possible. It doesn’t makes sense to go to open houses and tour $400,000 homes if a buyer’s loan is only around $200,000.

To get pre-approved, buyers will need to provide their bank with income statements or pay stubs, as well as documents including bank account statements, car loans, last two years of tax forms and W2 forms from the same time period. Combined with your credit score that they’ll pull, lenders can use this information to assess your likelihood of paying a loan back on time and from there, let you know what you’re pre-approved for. Then, buyers can take the next steps toward their new home by finding a reputable agent they trust. Armed with this knowledge, loan pre-approval and credit score history, they’ll be that much closer to crossing the threshold into the property of their dreams.

Courtney Myers
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