A recent report from the California Association of REALTORS (C.A.R.) confirmed that home prices in…
Many articles have been written on the home buying process in California. But a lot of them skip over the preliminary steps and jump right into the house-hunting stage.
The truth is, there are some important steps that should be addressed before a person starts shopping for a home. In this article, we’ll explain nine of the things you can start doing right now, to prepare for the home buying process in California.
1. Determine your housing budget.
Pop quiz. How much can you comfortably afford to spend on your housing costs each month, given all of your other recurring expenses? If you can’t answer this question off the top of your head, you have some homework to do.
Establishing a clear budget is one of the best things you can do to prepare for the home buying process. It will help you focus your housing search and avoid spending too much on a home.
But we’re not talking about higher math here. All you really need to do is examine the amount of money you earn each month, and the amount you spend on your recurring debts (credit cards, car payments, etc.).
If you subtract your non-housing debts from your net monthly income, you’ll have some idea of how much you can spend on your monthly housing payments. But don’t forget to leave some extra money in the bank for financial emergencies. You always want to have a little cushion for those curveballs life can throw at us.
The goal here is to calculate your budget by considering your income, expenses, and financial goals. You can also use online calculators to simplify the process and establish a realistic budget.
2. Check your credit scores.
If you’re going to use a mortgage loan when buying a home in California, your credit score will come into the picture. Your credit score is a three-digit number based on the information found within your credit reports.
You can think of it as a kind of risk indicator. A low score suggests that a person has had problems paying their bills in the past, which makes them a bigger risk to banks and lenders. A higher score, on the other hand, indicates a lower level of risk from a lender’s perspective.
A strong credit history with a relatively high score can help you qualify for a mortgage loan and secure a favorable interest rate. This in turn could make it a lot easier to buy a home in California, at least for those buyers who rely on mortgage financing.
Start by reviewing your credit reports to ensure accuracy. Errors in these reports could drag down your score unnecessarily. Next, you’ll want to order the actual score itself, to see where you stand right now. You can request everything through AnnualCreditReport.com, among other sites.
There is no hard-and-fast rule regarding the minimum credit score needed for a mortgage loan. It can vary based on the lender and the type of loan you are using. Just know that a higher score is better when it comes to applying for a mortgage loan.
3. Start saving for a down payment.
Home buyers who use mortgage loans typically have to make a down payment of some kind. The one big exception is the VA loan program, which allows borrowers to finance up to 100% of the purchase price. But for most other types of loans, an upfront investment will be required.
The required down payment can vary from 3% to 20%, depending on the type of loan you use and other variables. In a relatively expensive real estate market, such as California, those percentages can add up to a significant amount of money. So the sooner you start saving for a down payment, the better.
You might even want to automate the savings process, to make it even easier. For example, you could set up a recurring transfer from your checking account to savings account each month. Most banks and credit unions offer this type of feature.
4. Explore all of your financing options.
You have a lot of different financing options when buying a home in California. For instance, you can choose between a government-backed mortgage program like the popular FHA loan, or a conventional mortgage loan that does not receive federal backing. There are pros and cons to both of these choices, as explained in this article.
If you happen to be a military member or veteran, you should give the VA loan program some careful consideration. First-time buyers with limited down payment funds often lean toward the FHA loan program, which allows for a down payment as low as 3.5%.
If you’ll be buying a relatively expensive home that exceeds the conforming loan limit for your county, you might need to use a jumbo mortgage loan. These loans often require a larger down payment, due to the higher level of risk involved.
These are just a few of the choices you’ll have to make when buying a home in California with a mortgage loan. The more research you do up front, the easier it will be to choose the right financing option when the time comes.
5. Get pre-approved for a mortgage.
Once you’ve established a budget and reviewed your credit situation, you can get pre-approved by a mortgage lender. This will help you in two ways.
First, you’ll find out if you’re a good candidate for a mortgage loan. Secondly, you’ll be able to determine how much you can borrow, based on your current financial situation. This in turn will help you focus your housing search on a specific price range.
6. Be realistic about your negotiating leverage.
Spend some time researching your local real estate market before buying a home in California. You’ll have an easier time making an offer on a house if you know what similar homes are selling for in the area.
Market research can also help you understand how much leverage you have, when it comes to negotiating the price and other terms. If your market is currently experiencing an inventory shortage, there’s a good chance sellers have more negotiating leverage then buyers. While in a slower market, the opposite might be true.
The idea here is to go into the house-hunting stage with the right mindset and expectations. And those expectations should be based on current market conditions.
7. Start gathering financial documents, or learn how.
California home buyers who use mortgage loans have to provide a variety of financial documents when applying for a loan. You can prepare for the home buying process by rounding up these documents early, or at least figuring out how to do so.
In California, mortgage lenders typically request tax returns, bank statements, pay stubs, documents relating to other assets, and divorce decrees when applicable.
8. Have a backup plan (and a backup to your backup).
Like much of the country, California is currently experiencing a housing market shortage. That means there aren’t nearly enough homes listed for sale to meet the current level of demand from buyers.
In addition to making the market more competitive, this could extend the length of your housing search.
You might have your sights set on a particular home in a particular neighborhood. But you can rest assured that other buyers are eyeing that same property and that same neighborhood. So you will probably run into some competition when the time comes to make an offer.
If your first choice doesn’t work out for some reason, go to your backup plan. Look at other homes. Consider other neighborhoods, communities or cities. Be open-minded and flexible.
When buying a home in a competitive real estate market like California, buyers rarely get everything they want. Compromise is the name of the game.
9. Develop your home buying Zen.
The home buying process can be emotionally taxing. This is especially true for first-time buyers who have never been through it before, and also for buyers with tighter budgets. When you add in things like low inventory and high competition, it can become even more stressful.
Try to keep the big picture in mind throughout your housing search. Remember that for each missed opportunity there is another one just around the corner. Bumps, hurdles and obstacles are common when buying a home. But there’s a solution to any problem that comes along.
Keep your head up and your eyes on the prize, and you’ll get there eventually!