Buyer’s, how do you determine how much you want to spend for your next home?
What may seem like an obvious answer to a Realtor, is not always that simple for a buyer, especially a 1st time home buyer. A Realtor should automatically say “Contact your lender to determine your price range”. But many times, this is not how buyers go about determining their price range.
As a Buyer Specialist, I have become increasingly aware that many buyers are not contacting a lender prior to looking at homes. As a Realtor, it is our job to educate buyers on the home buying process and this includes determining your price range.
So if you are seriously considering a move, the very FIRST thing to do is to contact a lender BEFORE you begin your searching. There are many reasons why this is the most important first step to home buying! First of all, in today’s Mortgage Business, the guidlines for qualifying a buyer to purchase have been changing so frequently, sometimes even daily. Only a lender can determine 1st and formost if you are qualified to buy a house. But lets say that you already know you have good credit, you have a good job, you have some money saved, and you are certain you can qualify for a loan. That is great! But you still need to contact a lender before you begin searching.
When qualifying a buyer for a mortgage, lenders use many factors to determine how much you can afford to buy. These factors include your credit score, your debt to income ratio, amount of down payment and even the current interest rate.
Ok, so you may be asking “what’s the harm in looking first and then contacting a lender when I find something I like?” While there may not be any real harm in this approach, I can give you some insight as to why this is a bad idea.
First of all, suppose you think you can afford a house somewhere between $175,000-$200,000. So you begin searching the internet, looking at homes in this price range. You then start going to open houses and calling off yard signs to see homes. Perhaps at this point you then begin working with a Realtor. Your Realtor refers you to a lender to get preapproved. You call the lender and at that time find out you do not qualify to purchase homes in this price range. So now, all the houses you have been seeing, and may even like, you cannot afford. You now have to start over, looking at homes in a lower price range. The problem with this, is that homes in the lower price range may not have the same features, or be in the same location as the more expensive homes you have already seen. You then have to readjust your expectations of what you can buy. And I will tell you that it can be very discouraging to look at less when you already have your heart set on more.
Another problem with looking before contacting a lender is almost the complete opposite of the above scenario. Suppose you think you can only afford to purchase a home up to $175,000. You really did not use any hard facts to determine this price, it just “sounded” right to you. You contact a Realtor to help you search for homes and again the Realtor refers you to a lender. At this time the lender informs you that you can afford to purchase above the range you are looking in. In fact, you might be able to afford a substantial amount higher. Ok, so what’s the problem with that? Sounds like good news to me! The problem is that many times when a buyer can afford to spend more, they are very hesitant to do so. Don’t get me wrong!! I am not talking about over-committing or being house poor. Rather I am talking about increasing your price range by $5000-$10,000. Most buyers do not realize that increasing your range by small increments, does not greatly affect your monthly payment. In many instances increasing your price by $10,000 usually means less than $70/month on your mortgage. So buyers are limiting their options unnecessarily. Then when these buyers do agree to look at a higher priced home, they are anxious that they are going over “their limit” when their limit was not based on how much they could really afford to begin with.
So before you make any decisions about how much you can afford to purchase, please contact a lender and with their help, determine the price that best suits your income level and your comfort level.
If you do not have or know of a reputable lender, then start by hiring a qualified Realtor to assist you. A qualified Realtor will help you find a lender and then help you purchase the home of your dreams!