New Year’s Resolutions for Home Buyers

As we get ready to say goodbye to 2005, it’s worth looking back at the year that was for home buyers.
 

With more than 8.5 million existing and new homes sold, and with 30-year mortgage interest rates still below 6.5 percent, it’s been a banner year for residential real estate.

Watch out, Mary Poppins. The wind has shifted.

In 2004, investors accounted for about one-third of all home purchases. According to new reports, some of those investors are starting to list those properties, pushing up inventories in communities like Phoenix Arizona. This year, some real estate observers expect investors to account for just 10 to 15 percent of home purchases.

While home prices surged another more than 15 percent from October 2004 to October 2005, according to the Federal Reserve Bank, many metro areas saw homes appreciate at a much more modest level, particularly in the middle of the country.

In fact, one new trend has home buyers moving away from the coasts to escape the high-cost of homeownership there.

Giving up sunny California for snowy Chicago doesn’t sound like much fun when the city is experiencing its coldest start to winter in about 100 years. But being able to buy a 4-bedroom house in a good neighborhood with the same amount of money used to purchase a one-bedroom condo can make the move a lot more palatable.

So what does the new year hold for home buyers?

Slightly higher interest rates, according to Amy Crews Cutts, deputy chief economist of Freddie Mac, which buys and sells mortgages on the secondary loan market. She expects interest rates to head up to 6.5 percent in 2006, which means homes should still be affordable.

A more balanced real estate market, with a more equal number of buyers and sellers in more markets. While not every market will slow, plenty will slow enough to give buyers a bit more leverage on price, terms and conditions of the contract.

If you don’t own a home, this could be your year to join the ranks of nearly 70 percent of U.S. households. If you are planning to sell your house and trade up, you may find yourself in agony as you easily negotiate to buy but have a tougher time selling.

In all, it should be a good year. If you’re planning to buy a home in 2006, here’s my annual list of New Year’s resolutions you should consider making:

As a buyer, I resolve to:

• Get my credit and finances in order.

Plenty of would-be buyers are paying off their credit cards, car loans, school loans, and other forms of personal debt. While having personal debt doesn't mean you can't qualify for a loan, it can lower the amount of the mortgage a lender might be willing to give you.

If you can only keep one resolution this year, choose to clean up your credit. One of the best things you can do to prepare for buying a home is to make your monthly debt payments on time. Even if you have a lousy credit history, lenders will be more forgiving if they see you’ve gotten your act together in the last six months to a year.

While you can purchase a copy of your credit report from each of the three credit reporting bureaus (Trans-Union.com, Equifax.com, and Experian.com) for around $9, you’re better off paying $14.95 and purchasing a copy of your credit report and score from www.MyFico.com, a joint venture between Equifax and Fair, Isaac.

Or, check out your credit report for free. Go to www.annualcreditreport.com to get a free copy from each of the three credit reporting bureaus. You’re entitled to do this once a year from each of the bureaus, and if you stack it right, you could pull a free credit report every four months. At the time you get a copy of your credit history, you’ll be asked if you want to buy your credit score. The cost is $6.95, which is still less than buying it through MyFico.com.

• Get my credit in shape.

Put a lid on your spending, perform “plastic surgery” on your credit cards, and don’t max out any one card or your credit score will suffer. If you’re going to cancel an account, do it in writing, but you get bonus points on your credit score the longer you maintain a credit account. So a credit card account that you opened in 1984 is worth more than one you opened last month.

Don’t forget that good credit also means job stability. Most lenders require that you work for the same employer for at least a year, and maybe two, before they’ll approve your home loan application. If you’re self-employed, they’ll want to see at least two years of tax returns before you’ll qualify for a conventional loan. If you're offered a better job in your field, by all means take it. But if you want to buy a home, try not to jump from job to job to job within a relatively short period of time.

• Know how much I can afford to spend before shopping for a home.

You have three options when it comes to figuring out how far your down payment and income will take you: You can guess; or you can pay a visit to your local lender, who will pre-qualify or pre-approve you for a loan, or you can go online.

Your lender will look at your income, debt, assets and liabilities and come up with the maximum amount you can spend on a home. Once you know how much you can afford to spend, you'll avoid making a common, heartbreaking, home buyer error: Looking at homes you can't afford to buy.

Too busy to visit a lender? There are several web sites that offer good mortgage information. Try E-Loan (Eloan.com), or HomeAdvisor (www.homeadvisor.com). These sites offer loans from a handful of lenders. Visit Bank Rate Monitor’s site (Bankrate.com) for a state-by-state look at current interest rates. For other lender sites, try the International Real Estate Digest (www.ired.com).

• Know my neighborhood, and be comfortable with it, before I buy a home there.

Everyone wants to live on the best block in the best neighborhood. Unfortunately, that may not be economically feasible. You might be able to afford the smallest home on the best block, but that won't do you much good if you need four bedrooms and that home only has two. Balancing affordability with location means making you may have to compromise. While you may be willing to compromise on the size garden you have, you may not be willing to change your children's school districts.

Start looking at various neighborhoods and the amenities they offer. Is there a park? Shopping? Transportation? A house of worship? Do your friends and family live close by? Be careful not to limit your choice of neighborhoods too early on in the process. Explore new areas and the housing stock and amenities they offer.

Make sure you spend time during different parts of the day and night in the neighborhoods you like. Walk the streets, go into local shops. Visit the neighborhood police department and local schools. Stop by the local park district offices and see what programs and classes are available. Drive the commute from prospective neighborhoods to your job during rush hour. Get to know the neighborhood and its residents inside and out before you buy.

• Interview at least three brokers before hiring one.

There are traditional agents, buyer agents, exclusive buyer’s agents (who never represent sellers) and discount agents. There are large brokerage firms and small neighborhood shops. You can even choose not to use a real estate agent, although as a buyer who won’t be out of pocket for the cost, there’s no reason not to use one.

Many buyers today opt to use buyer agents, or buyer brokers, who represent the interests of the buyer rather than the seller. One study showed that buyers using buyer agents or exclusive buyer’s agents paid as much as 5 percent less for their home than those who use traditional agents. That’s $5,000 saved on every $100,000 spent.

Choosing which agent to use -- or choosing not to use an agent -- can be critical to your successful purchase. Look for an agent whose philosophy and mannerisms are compatible with yours. Look for someone you can trust, with whom you wouldn't mind spending a lot of time. Look for an agent who has ample experience, and who is knowledgeable about the neighborhoods you've selected for yourself.

Make sure you interview at least three agents from three separate firms before making a choice. Each will have a different philosophy about the home buying process, and each will bring that different viewpoint to the table. Use it to your best advantage.

• Read and understand all documents before signing them.

So many folks don’t even bother to read either their purchase contract or loan documents. That’s unfortunate, given the enormous legal implications of a home purchase.

Take the time to read all documents thoroughly. Ask an attorney or broker to explain things that don’t seem to make sense. It’s important that you understand what promises have been made and what warranties have been granted, and what implications these documents have for your personal financial and emotional well-being.

NEXT WEEK: If you’re trading up, you’ve probably got a home to sell before you can buy. How can you stay out of trouble? Next week, we’ll continue our look back on 2005 and I’ll have your Home Seller Resolutions for the New Year.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.