So you’ve decided that this is the year but there’s one problem: you have no clue where to start. How much money do I need? How much will the bank lend to me? How do I find a Realtor who knows what the hell they’re doing? I’ve got answers.
Let’s talk about the elephant in the room first. Housing affordability is bad right now. Since the start of 2020, right about the time a certain global health crisis was beginning, home prices nationally are up around 35%. Work-from-anywhere combined with needing more elbow room since everyone’s home now combined with the Fed buying mortgages to subsidize low rates combined with stimulus checks combined with a decade of underbuilding new houses led us to this. Since around the middle of last year though, the Fed both stopped buying up mortgage-backed securities (and if you want to get in the weeds, have at it) and started raising their Federal Funds Rate, which had the intended effect of getting mortgage rates high enough to get people to stop buying houses at stupid prices. It’s been working, but it takes time. In other words, right now we are at a spot where home prices are still higher than they were three years ago AND interest rates are no longer being kept unsustainably low.
That’s the bad. The good news for you, the buyer, is that the environment for home buying is much less competitive than it was as recently as last spring, and affordability has been improving in recent months. Interest rates have held fairly steady since November, while the median home price on the west side of the Portland metro has dropped to 2021 levels, erasing those gains we saw in last spring’s silly season. If you can afford to be in the market right now it’s a good time to be a buyer, or at least better than it has been in the recent past.
If your next question is will interest rates come back down my answer is probably, but not by a lot, and who knows when. It’s actually a longer answer than that but attention spans have limited abilities, so just remember this part: like stocks, you can’t time the market. Also, if rates go lower prices will go higher. Bank on that.
On to the whole point of this post (finally). What do you need to do to be ready to buy?
STEP ONE: THE MONEY
First and foremost, you have to have your financial ducks in a row. A lender is going to focus primarily on three things:
Credit Scores: The minimum credit score to get a conventional loan is 620, while 580 can get you an FHA or VA loan. However! If you’re on the lower end, you’re likely going to need to exceed minimum requirements in other categories- like down payment- in order to get approved, and your interest rates will be higher. If you have the time and ability to improve your scores, get to it.
Assets: Do you have enough money for a sufficient down payment? Can you prove where it all came from? It doesn’t have to be 20%. The minimum requirement on a conventional loan for someone who has not owned a home in the last three years is 3%, while it’s 5% if you’re not new. The national median for a first-time buyer was 6% in 2021. Beyond having enough for a down payment, you’ll need some cushion for closing costs (which are highly variable) and, well, living. There are few guarantees in life, but among them are that something expensive in your house will break in the first couple of years.
Income/Debt: Lenders mostly judge your income by it’s relationship to your debt. Of the many acronyms you’ll encounter in this process, DTI (debt-to-income) is one of the more important. Put simply, this is the ratio of your fixed monthly debts (loan payments, credit card debt, etc.) to your gross income. So if you have $3,500 in monthly payments for the above items- which would include a projected monthly payment for the new house you want to buy- and a gross household income of $10,000 a month, your DTI is 35%. That’s a decent number, although lower is always better. You can get approved for a loan up to 45-50% in some cases, but like with credit scores you’ll need to compensate for that high ratio with other factors, and you won’t get the best interest rate. Rule of thumb: if you can keep this number under 36%, you’re in great shape.
So you’ve got some money in the bank (or the Bank of Mom and Dad, for whom business is always booming), a steady job with a decent paycheck, your credit and debt are in check, and you’re tired of your cranky landlord. Time to find a house. But how?
STEP TWO: THE FUNNEL
Even in a low-inventory environment- and we’re in one now- there are tons of houses for sale. As I’m writing this, there are 958 single-family homes listed on the west side of the Portland metro. If you haven’t focused on location or what type of things you want in a house, what you’re going to need is a big (figurative) funnel.
Narrowing down is the name of the game. You start by seeing A LOT of houses- both on the home search site of your choosing and by going to see them in person, whether with a Realtor or to open houses. Going to open houses is a fantastic, low-pressure way of just getting out there and seeing what you like and don’t like. Don’t worry too much about giving your email address to the pushy Realtor, just give them the burner account and you can ignore them later.
Your needs and wants will change as you search, and chances are you won’t ever find every single thing on your list. If you get to 80%, you won. Assuming you’re shopping with a partner or spouse, you’ll also find yourself trading must-haves and dealbreakers with them. The point of this step is to bring the search down to a manageable level- one you can wrap your arms around- so you don’t waste too much energy on houses that won’t fit.
STEP THREE: CALL IN THE PROS
Do you need a buyer’s agent? No. Should you get one? Yes. The person selling their house hired one who has a fiduciary duty to represent their interests and only theirs, so you should have the same kind of representation on your side. Also, you don’t have to pay out of pocket. A buyer’s agent gets paid out of the commission on the sale of the house, and that commission was already decided upon between the seller and their agent prior to the house being listed.
How do you find one? Recommendations and referrals are one popular way to go. If you have friends or relatives that had good experiences looking for a similar thing (and in a similar area!), ask them. Meeting agents at open houses is also one way to shop, as you’ll meet quite a few and quickly get a feel for what caliber of agent they are.
When talking to agents hosting an open house, I suggest asking them about three subjects: the market (national and local), the location, and the house. What’s the market like right now? What do you think is going to happen with interest rates? What do you like or not like about this area? What do people think about the schools? How old is the furnace? Who built the house? Those kinds of questions. Feel free to throw in a few stumpers too (I was once asked what kind of underlayment the roof had). The point here is to see how prepared the agent was for the open house, because if they’re not educating themselves on the market or the house they’re working at that day, they won’t be prepared to do the job you need them to do. But it’s OK if they don’t know what kind of underlayment the roof has.
You will also probably need to find a lender, assuming you’re not paying cash (ha!). You can do this before or after finding a buyer’s agent. Every Realtor knows a bunch of good lenders and every lender knows eleventy billion Realtors, so you can always get a rec from one or the other. That recommendation from a Realtor will be for a knowledgeable local lender with a great reputation for responsiveness, which is quite important when dealing with all the deadlines that come with a home purchase. Otherwise, going with a credit union is usually a good plan (they will be cheaper), the big bank where you do your banking can be hit or miss on service, and anything with a dot com in their name should be avoided.
Once you’ve picked a lender (or more than one- you can do that too) you’ll want to get yourself pre-approved, which isn’t as big of a deal as it sounds. They’ll ask you to upload a bunch of tax returns and pay stubs and the like and then tell you how much they’ll lend, pending a more intensive review once you’ve actually found a house to buy (that part is called underwriting. It is not fun at all). This pre-approval will be good for 120 days. It won’t have a rate attached to it, as that isn’t determined until you go into contract on a house. Also, rates change every day and closing costs vary so if you’re shopping lenders, make sure you’re comparing apples to apples.
FUN FACT: you can inquire with multiple lenders and even get more than one pre-approval without causing extra pain to your credit score. After the first credit pull for a mortgage, any others within a 30-day period won’t be counted against you. Once you pick a house to offer on, you can decide which lender you’re going with.
STEP FOUR: LET’S GO SHOPPING!
Life gets much easier once you have a pre-approval in hand and a buyer’s agent at your side. You’re a real buyer now, able to walk into a house and potentially produce an offer for it within hours. That can be both exciting and terrifying. Steps one through three prepare you for this moment and give you confidence that you’re making the right decisions. Like all things, preparation is key.
Going back to a point I made earlier about not being able to time the market. If you’re at all a sane and rational person, you’ll be asking yourself the completely justifiable “is this the right time” question. Chances are though, affordability won’t change very much in the near term as even if interest rates drop materially, more buyers will come back and drive prices back up. If you want it and can afford it- and plan to stay in the house more than 3-5 years- don’t get too hung up on whether rates will be a half point lower in a year or if home prices will drop a few more percent. It’s a home first and an investment second, and it sure beats renting.
