As we get ready to say goodbye to 2007, it’s worth looking back at the year that was for home buyers.
Home sales are down around 20 percent from last year, according to the National Association of Realtors (NAR). Compared to 2006, when more than 8.5 million existing and new homes were sold, 2007 has seen soaring inventories of existing and new homes for sale, a record number of foreclosures, and the strongest buyers’ market in a decade.
Although sellers aren’t happy, those who did decide to buy found builders who were more than willing to deal on price and upgrades. Investors who tried to unload their properties often found no takers, leading to the largest number of vacant homes on the market since the number has been tracked.
Renters also seemed to be in short supply, dramatically boosting the number of foreclosures, bankruptcies, and, at the end of the year, prompting President Bush to announce a plan to help some borrowers with subprime mortgages avoid that fate.
Clearly, the wind came out of the real estate market, which some observers are calling the worst since World War II, and others claim is the worst since the Great Depression.
While the market is down, it’s not out. It’s just that compared to the last decade, the market moved much more slowly, giving buyers time to compare price and amenities and giving sellers heartburn.
The good news for buyers is that 2008 looks to get a bit worse in many markets. And that means deals are there to be made on favorable terms.
If you’re planning to buy a house this coming year, here’s my annual list of New Year’s resolutions you should consider making:
As a buyer, I resolve to:
1. 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. And, given the current mortgage crisis, lenders are paying close attention to your credit history and credit score.
If you 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 to 12 months.
Federal law now requires each of the three main credit reporting bureaus (Experian, Equifax and TransUnion) to give you a free copy of your credit history once a year.
To get yours, go to www.annualcreditreport.com. At the time, buy a copy of your credit score from Equifax. The cost is under $10, which is still less than buying it through MyFico.com.
2. 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 (in fact, never charge more than 30 percent of your maximum credit limit) 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 a lot 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 within a relatively short period of time.
3. 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; you can pay a visit to your local lender, who will prequalify or preapprove 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 Bankrate.com for a state-by-state look at current interest rates from lenders who work in your area, including online lenders. Every major mortgage lender has a Web site. And, don’t forget to check the rates at your local credit union.
4. 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 location may not be in your budget. 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 has only two. Balancing affordability with location means you may have to compromise. While you may be willing to compromise on the size of 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 and 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.
5. 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 you won’t be out of pocket for the cost, so 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 older study showed that buyers using buyer agents or exclusive buyer’s agents paid less for their home than those who used traditional agents.
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.
6. 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.
If you don’t understand the documents that you are being given and still don’t understand them after the broker has explained them to you, seek help from someone you trust or hire an attorney to assist you in the process. If the broker explains something to you and seems to contradict the document, make sure the broker writes into the document what she told you.