6 Steps for the Best San Diego Home Buying Experience
Are you looking to buy a home in San Diego? Whether you are a first time home buyer or an experienced homeowner, buying a new home is always stressful. Here’s a handy checklist of six things you can do up front to make the process a lot easier and reduce stress and set backs. Before you start packing, here’s what you need to do.
1. Prepare a Budget
If you don’t have a financial road map, it makes the home buying process very stressful because you don’t know what you can afford or how much down payment you need to save to be in a position to buy. Get a crystal clear picture of your finances before you even think about calling a Realtor or applying for a mortgage. List all your monthly fixed expenses, including rent or mortgage, car payments, utilities, school tuition, and student loan payments. Consider college fund and retirement contribution a fixed monthly expense as well. Add categories for other expenses such as food, gas, travel and entertainment. If you don’t have any idea what your budget is, you cannot get to step #3, which is the price range of home your bank will tell you that you can afford.
2. Know Your List of Debts
Knowing your list of debts and your debt ratios makes the buying process less stressful because you know what you can afford and are super organized so the process of getting a pre-approval letter goes a lot faster. In a seller’s market this is particularly important because you typically need to make a decision and offer quickly.
Installment Debt: If you have existing credit card debts, student loans or other debts that require regular monthly payments, write them all down in once place, so you know exactly how much you owe each month versus what you earn (income). This helps you figure out your debt (also called installment debt) ratio. There are plenty of online calculators that will do this for you, but you can also simply divide your debt by your income. For example, if you earn $10,000 a month, but you pay out $2,000 in credit card and loan debt payments, your ratio is 20%. Banks prefer your installment debt ratio (credit cards and other consumer debt) to be 10-15% OR LESS.
Housing Debt: You also need to know the portion of your income that will be dedicated to your housing debt expenses (including taxes and insurance). This is the percentage of your gross monthly income that banks look at to make sure you will make your mortgage payments. A standard ratio is 25-28%. For example, if you buy a $1,000,000 home, the bank looks for the all in payment to be $28,000 or less per year plus interest. Based on the interest rate, your monthly payment can vary. Banks then look at your installment debt ratio (credit cards and other consumer debt) which should be 10-15% OR LESS.
Debt to Income Ratio: These two ratios combine to form your total debt to income ratio. Banks do not like this number to be more than 40%. If yours is higher or you want to ensure you have enough leftover in the bank every month for home improvements or your retirement account, perhaps reconsider your choice to buy a home in your preferred area.
3. Get Pre-Approved for a Loan
Most sellers require proof of funds or a pre-approval letter from a proper bank in order to put in an offer. So be prepared. You need #1 and #2 above to get #3, which are all important before you start the home search, so you know what you can afford to buy.
If you start looking without knowing your budget, you are likely to waste a lot of time and get emotionally attached to a certain property that you may or may not be able to afford. Understand the difference between getting pre-qualified for a mortgage and being pre-approved.
Pre-qualified is a quick and simply gauge of what you might be approved for. Getting pre-qualified means that you give a lender your overall financial picture, including your debt, income and assets. The lender evaluates this information and gives you a ballpark figure of the mortgage amount for which you could qualify. Pre-qualification can be done over the phone or on the Internet, usually at no cost.
Pre-approved, on the other hand, means that a lender evaluates your debt ratios, your credit report, and your overall ability to repay a loan and says, “Yes, I would loan this buyer X number of dollars to buy a home.” This gives sellers confidence in taking your offer serious and should they accept, you have the means to close the deal. The last thing sellers want to do is fall out of escrow and start the process over.
4. Know Your Needs Versus Wants
Before you interview real estate agents, make a list of needs and wants – and make sure you know the difference! You need three bedrooms, at least two bathrooms and a garage. You want an office or a pool would be nice. You need to be very upfront with yourself, your partner and your agent about exactly what constitutes a deal-breaker in your purchasing process. One of the biggest miscommunications is partners not knowing what comprises each person’s needs and wants. For example, your partner wants to be close to the beach, but it adds an extra twenty minutes to your commute. So have that conversation. If you are not sure about where the house is located or what that lifestyle is like in that area, ask your local agent that lives in the area to help make sense of it. If an outside party is involved in making the final decision (e.g. a parent providing a downpayment), be sure that you are all in agreement. They may feel entitled have a say in the final decision. Resolve issues ahead of time or it will cause complications and delays in your home search and negotiating process should you make an offer.
5. Start Your Search
Once you’ve done the background work, it’s time to start looking. Today is no longer the age of agents driving you around to open houses. With syndication of the MLS, the need for an agent to get your search started is no longer necessary. In fact, 99% of home searches starts online. But there is an order of operations. Once you have found a few areas you like, take the time to drive the neighborhood, walk around, patronize businesses, and attend open houses. See if you can imagine yourself living there. Once you have narrowed your search and identified your search criteria such as zip codes, price range, minimum bed/bath count, and minimum square footage, you are ready to find an agent. The agent’s job is to walk you through the home buying process, help you prevent pitfalls, protect your interests, negotiate a deal and more. Good, local agents know of homes coming on the market, off market opportunities, and relationships with other local agents that help make the home buying process go smoothly and more likely to close on time.
6. Find a Local Realtor
Ask friends and family for referrals. Find realtors that specialize in the area you are looking. This can often be a very small radius, so do the homework. If agents claim to know specific areas, take a look at where most of their sales are located. Once you have found a few options, check out their websites, reviews, and see if you connect with their personality and style. Do they have knowledge of the community and lifestyle? Schools? What recreation does the area offer? What are the similarities and differences of each micro neighborhood within the area? Are they involved in the community? Do they have kids? Do they live there? What are the pros and cons of the area? Do they seem professional and have done enough deals to know how to help you navigate that market?
Don’t be afraid to ask probing questions. Remember, this person is going to help you negotiate the biggest (or at least one of the biggest) asset purchases in your life. You should be able to ask them anything and the conversations be honest, confidential and reality based. If you get the feeling that an agent is trying to talk or scare you into buying, they may not be looking out for your best interests. Here are a few interview questions to get you started:
- How long have you been in real estate?
- Do you educate me (the buyer) every step of the way?
- Do you represent both buyers and sellers?
- How many buyers are you currently working with? How many sellers?
- How many homes did you sell last year?
- How familiar are you with the neighborhoods we are considering?
- How do you know what homes are coming on market?
- Do you work well with other local agents? How does that help me?
Start Your Real Estate Journey Today
Buying a home could well be the single most important decision you will ever make, both financially and emotionally. However, if you do your homework and prepare thoughtfully for the process, it can also be a fun and rewarding experience. Reach out to learn more about our local market and see if we are the right fit for you! Happy hunting!
