Buying Your Dream Home in a Hot Housing Market

The housing market is heating up. However, this time, it’s a seller’s market—meaning inventory is tight, giving seller’s the edge in negotiating sales. In some really tight markets, houses are sold within days, sometimes hours of their listing. That means, if you are in the market trying to buy your dream home, you need to have all your ducks in a row. It wouldn’t hurt to over-prepare so you can act quickly when that dream home becomes available.

Here’s your pre-search checklist for taking control of your home-buying process.

Calculate precisely how much house you can afford

You can count on lenders abiding more strictly by their debt-to-income ratios requiring much more income verification. While the standard 36 percent ratio of all debt to income remains standard, you should shoot for 40 percent or higher. That may mean considering a smaller house, but it will improve your chances of obtaining a loan on good terms. You also need to factor in other housing costs, such as insurance, association fees, property taxes, and maintenance costs, when calculating your housing budget.

Although there are still 0 percent to 10 percent down payment loans available, they are only approved for the most creditworthy buyers. Plan on putting at least 20 percent down if you want more mortgage options. You will also save on PMI costs.

And don’t forget to account for all of the out-of-pocket costs associated with buying a home, including closing fees and moving expenses. These can amount to an additional two to three percent on the purchase prices of the house.

When calculating your total out-of-pocket costs, you should add another two to three percent to the price of the house to cover closing costs.

Check your credit, again and again

Even if your home purchase target date is several months out, you need to start checking your credit report now. You will need the time to clean up any errors or dings, and because your credit score can change almost daily, you need to monitor its direction. A 25 point drop in your score at the last minute could be the difference between getting a loan on the best terms or not.

When you are within a couple of months of applying for a mortgage, you will want to take all available steps to keep improving your score. The moment you know you will be buying a house within the next six months or a year, you should subscribe to a credit monitoring service that compiles data from all three credit bureaus and reports credit activities to you daily or weekly.

Organize all required documents

To ensure you can act quickly on a home, you need to get pre-approved by a lender. That can happen relatively soon if you have all the documentation lenders need. It should be well-organized and bound with tabs. The key is to be as thorough as you can in providing income verification. At a minimum, your documentation should include:

• Two to three years of W-2s
• Two to three years of tax returns
• Six to 12 months of paycheck stubs
• If self-employed, 12 months’ income statement
• Documentation of all income sources
• Detailed asset-liability record
• Current statements from bank and investment accounts
• Canceled checks or detailed bank ledger showing rent or mortgage payments

Evaluate lenders

It’s essential to understand the lending landscape in your area. It’s relatively easy to compare interest rates and other borrowing costs, but you will also need to know about the interest rate lock guarantee if mortgage rates are trending up. For the most transparency and responsiveness, you should try to work directly with a lender.

Get Pre-Approved

A pre-approval is like walking around with cash when you are talking to home sellers. It can give you an edge over other home buyers and the confidence to make your best deal on your dream home.