If there’s anything we learned from the housing market down turn of 2008, it’s that buyers need to purchase homes they can afford. Too often as real estate agents, we see buyers with plenty of debt and only a moderate income getting half a million dollar homes. Some buyers assume that if a lender is able to creatively get them qualified for a $500K home, that should be the price range they shop for. However, you need to make your own personal decision on what price range and monthly mortgage payment you’re comfortable with.
Get Pre-Approved for a Home Loan
Getting pre-approved should be the first step in your home search for several reasons. The most obvious reason is that knowing what you can afford can make a difference in the size, quality, and location of the home you end up purchasing. There is no sense in getting your hopes up for a house in Mount Pleasant when you can only afford a townhouse. Knowing this before you start looking at homes in person is so important because after you start looking at $300,000 houses, it’s very difficult to adjust your expectations for a $225,000 townhouse. On the other hand, if you start out knowing that you need a house with a yard and your budget is $225K, we can begin the home search looking in a more affordable area like West Ashley where this is a reasonable budget for a house.
Even if you think you know which homes you can afford, you should still get this pre-approval for negotiating power in our very strong seller’s market. Most sellers want to see a pre-approval letter when you make an offer on the home you want to buy. Sellers don't want to risk taking their home off the market for someone who is not a serious and able buyer, especially in the increasingly common multiple offer situation. So, getting this pre-approval letter upfront allows you to make an offer on a home as soon as you decide to buy it (instead of letting it sit on the market while you try to get pre-approved).
Compare Your Mortgage Estimate to Your Current Spending
Once you’re pre-approved for a loan, your lender should be able to estimate your monthly payments based on your credit score, down payment, etc. Included with your monthly payment is usually an escrowed amount that pays for your annual taxes and insurance (be sure to confirm this with your lender). How does this amount compare with what you’re currently spending on rent/housing?
Will there be large, out of pocket expenses that you foresee with your purchase? As you visit each home with your real estate agent, keep note of the age of the roof, HVAC system, and water heater because these are some of the most expensive items to replace in the first years of homeownership. For estimates, these amounts are a good starting point, but know that they vary based on the size and condition of the home, among other factors:
- Shingled roofs last anywhere from 15 to 25 years and cost usually $6,000 to $9,000 to replace. If there are tree limbs touching the roof, be sure to get them trimmed after you move it. Limbs can loosen and bend shingles on a windy day.
- HVAC systems usually have a lifetime of 12 to 15 years. This can be shorter if they have not been serviced properly, or if the owners keep their home cold in the summer and hot in the winter. A new HVAC system costs about $5,000 to $7,000. Be sure to change out your air filters monthly in order to avoid making your HVAC work harder than it has to.
- When an old water heater finally gives out after 10 or 12 years, replacing it with a tankless version will be more expensive upfront (usually $3,000 to $4,000) but can save 50% or more on energy used.
Consider Getting Some Closing Costs Paid by the Seller
Although these closing costs will simply be added to your purchase price (and your mortgage), it might be worth the peace of mind. Many buyers (especially first timers) feel stressed about the amount of money they will part with at closing. Two ways to keep more money in your pocket are to keep a comfortable purchase price and negotiate closing costs into your offer to purchase.