What Do You Need to Know About Buying a House in Today's Market?

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December 2009

Thinking of buying a new home? Today’s housing market offers opportunities, pitfalls, and confusing situations. For example, home prices on average may be the most affordable they’ve been in twenty years, according to experts, but placing the right value on a home can be difficult, given the high rate of foreclosures on the market and other variables. Mortgage rates remain low, but loan qualification requirements have tightened. And the list of potential concerns goes on. This month, we’ll look at some of the information and steps necessary for shopping and buying wisely in today’s housing market.

 

Putting your finances in order — the first step

Before you go shopping for a home, you need to determine what you can afford to spend. You'll need to plan for your monthly mortgage payment and other monthly expenses, the down payment, closing costs, and cash reserves. Requirements are typically more strict today than during the housing boom.

Know what is in your credit report and what your credit score is. Your credit report and your credit score are some of the factors that go into determining if you qualify for a mortgage and the terms of the mortgage. By checking your credit report before you apply for a loan, you can correct any errors that are in it. You can get your credit report for free* at the federally-mandated site, annualcreditreport.com. You can also purchase* your credit score at the same time. If your credit score has slipped, as many have in today’s troubled economy, you can take steps to improve it before you start shopping for a mortgage. [*Please review the terms and conditions before signing up for any service.]

Before shopping for a home, put your finances in order Do you know what is in your credit report and what your credit score is? Do you have enough money for a down payment and still have cash reserves? Have you gotten preapproved with Educators?

Down payment. The days of little to no down payment are gone. Borrowers now need to have at least a down payment of 3.5% of the purchase price. That's the requirement for an FHA loan. Conventional loans typically have higher down payment requirements in the range of 10% - 20%. Also with an FHA loan, you can receive help for the down payment such as gifts from family members and down payment assistance programs.

Cash reserves. Do you have enough money set aside so that you can pay your monthly expenses, including the mortgage, for several months? You don't want to use all of your cash for the down payment. Lenders will want to see that you have those cash reserves.

Get preapproved with CCU. Getting preapproved for a mortgage will let you know the maximum amount that CCU (or another lender) will loan you for a home. To get preapproved, you will need to apply for a mortgage. Make sure that you are getting preapproved, not just prequalified. "Prequalification" is typically an opinion of what you might be able to borrow for a home.

Are you a first-time homebuyer? If so, there are programs that may help you buy a home. If you've owned a home in the past, don't think that automatically excludes you. With some programs, you may be eligible if you haven't owned a home for a certain period of time such as 3 years or more.

Federal tax credit. On November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 was signed into law. This law extends the deadline for purchasing and closing on a home and expands the first-time homebuyer tax credit allowed by previous Acts to include long-term homeowners.

To qualify for the credit, the taxpayer must buy or have a binding contract to buy a principal residence by April 30, 2010 and close on the home by June 30, 2010.

The tax credit for first-time homebuyers is worth 10% of the purchase price up to $8,000. The tax credit for long-term homeowners is worth 10% of the purchase price up to $6,500. To qualify for the credit, the long-term homeowner must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased.

There are income limits. For homes purchased after November 6, 2009, to receive the full credit, a single taxpayer must earn less than $125,000, married couples less than $225,000.

The IRS provides more details about the tax credit on this page on their website.

Looking for the right house

Once you know what you can afford, you can start looking for a house that meets your needs and budget. The StraightTalk Home Buying Guide can help you through the process of finding and buying a home.

Checking out the house

If you think you've found a house that meets your needs and budget, the next step is to check it out.

If you've followed the tips in the StraightTalk Home Buying Guide, then you've checked out the neighborhood, the area surrounding the neighborhood, the services provided, and the schools. The quality of schools in an area can impact the value of a home, so even if you don't have kids, check them out.

You'll also want to check the number of houses in foreclosure in the neighborhood. A large number of foreclosures can depress the value of other homes in the neighborhood. Foreclosed properties also may not be kept up and this too can depress property values. A large number of vacant homes in a neighborhood may also affect security and safety.

If you'll be paying condominium or homeowner's association fees, you'll want to check out the bylaws and the financial health of the association. Look for things that could cause your association fees to increase or require special assessments. An overbuilt supply of condos in many regions of the country may affect such things.

You'll want to have the home inspected to make sure that it's in good shape. You should plan to go along on the inspection and don't hesitate to ask questions. Typically this is done after you've made an offer, but in some areas (particularly if you are considering a foreclosure) a pre-offer inspection may be a good idea. The StraightTalk Home Buying Guide provides tips for finding a professional home inspector.

Given the many changing variables in today’s housing market, you may wish to consider using a buyer’s agent who is very familiar with the locales where you are considering homes to help you with these processes.

Figuring out what price to offer

In the current environment – falling prices, short sales, and foreclosed properties – determining the correct value for a house can be difficult.

Look carefully at the comparable homes or "comps." Unless you are buying a foreclosed home, then foreclosed homes should not be used as comps. Comps will be used in the comparative market analysis prepared by a real estate agent and report prepared by an appraiser. The appraised value of the home affects the amount of mortgage that a lender is willing to loan on the property. So check the comps carefully to make sure that they are actually similar to the home you wish to buy. In some circumstances, you may wish to have your own independent appraisal done by a qualified appraiser experienced in the area of your intended home. Again, working with a qualified buyer’s agent to help with the valuing and offer process may be advisable.

Making the most of opportunities

Today’s housing market offers great opportunities for qualified homebuyers who invest the time and diligence it takes to get the information needed to make wise decisions.

For more information

CCU Mortgages

StraightTalk Home Buying Guide

StraightTalk Mortgage Guide

First-Time Homebuyer Credit from the IRS

Prepared for Corning Credit Union by Remar Sutton & Associates, December 2009. All rights reserved.

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