WRE News March 29, 2023
In today’s market, things are a little intense for first-time home buyers. But just because house prices are skyrocketing and interest rates are higher than what they were a year ago doesn’t mean buying a home is out of reach for you.
In this article, we help walk first-time homebuyers through the market today.
The average United States home value just over $327,000, up 6.8% over the past year. With interest rates skyrocketing, home prices continuing to increase, and a low house inventory, new homebuyers just aren’t interested in entering the market right now.
However, trying to predict the “best time to buy” is difficult. Between inflation, gas prices, the war in Ukraine, COVID, and a will-it-won’t-it uncertainty about an impending recession, it’s impossible to know whether prices or interest rates will improve anytime soon.
The better bet, according to many real estate agents, is to avoid trying to predict the market and instead determine what’s best for your particular circumstances and financial situation.
Whether you’ve decided that the time to buy is now, or if you plan to hold off until your financial situation improves, here are some tips for preparing to purchase your first home.
This one can seem extremely intimidating to those who don’t have perfect credit.This may surprise a lot of people, but you don’t need a 700-800 credit score to purchase a home. FHA loans are intended for first-time homebuyers, and for people who have a lower credit score, they may allow a minimum credit score between 500-580. You will however need to have 10% of a down payment. If your score is above 580, you may be able to put down less.
However, especially with today’s high home prices, many first-time homebuyers may not have 3.5% – 10% to put down. So if that is the case, sit down with a lender and have them work with you on your goals and what you will need to do to buy a home, and a realistic timeframe to do so. It may mean increasing your savings, improving your credit score, or both–finding a lender who is honest and willing to work with you is the first step.
After figuring out your feasible downpayment, target credit score, and what you need to do there, the next step is nailing down your budget. What can you realistically afford? Sitting down with a financial advisor and going over your finances to create a budget would be a great start.
Housing searches can be fun but can get out of control fast if you don’t know what you can afford. Knowing your budget can temper your expectations and keep you from over-dreaming (or overspending) in the future.
Have a down payment figured out, lock in a rate that won’t nickel and dime you, and go from there. You also need to factor in mortgage insurance, as well as property taxes. Meeting with someone who can tell you what those items will cost will help you when you’re searching for your first home.
Regardless of your level of income, you should be able to document to potential lenders that you have a stable source of earnings. Lenders look for two-year employment history and will want to see consistent income—whether you’re receiving a salary, hourly pay, or are self-employed.
In terms of your liquid funds and overall financial health, in addition to reviewing your credit report, mortgage lenders typically look at your bank statements from the last two months when assessing your application. If you plan to make any deposits into your checking or savings accounts from other assets — such as a down payment gift — do it before that 60-day window. This gives the funds time to “season.”
Even if things are still a ways out for you, it’s always good to shop for the right lender. Getting multiple quotes and seeing who can get you the best deal can mean saving time and effort when pen meets paper.
You should already have a good idea of what you can afford and are comfortable with, what areas you can afford, and what kind of down payment you can put down. Compare mortgage rates from different types of lenders as well as different types of mortgages to help you decide whether this is a good time to lock in your rate. It’s also a good idea to focus not only on the rates you’re being quoted, but all the terms of the mortgage. What are the late fees? What are the estimated closing costs? Is there a prepayment penalty? If you’re able to get a mortgage with the bank where you already have accounts, will you get a better deal?
As soon as you settle on a lender, get a preapproved letter for your mortgage. You will have to turn this in with an offer you send in on a home you like. A good real estate agent will already know this and get it from your lender, but it doesn’t hurt to double check.
Don’t get the pre-approval letter mixed up with your pre-qualification letter, which is a projection of the possible loan size you’ll be able to get. A pre-approval is an official letter from a lender stating exactly how much they will loan to you. This will put you in a much stronger position when you’re making an offer on a house and it will ease the process once your offer has been accepted and you’re actually applying for your loan.
There are many first-time homebuyer and down payment assistance programs, including at the local, regional and national level, that can help you cover your down payment and closing costs. These programs are limited to borrowers with an income below a certain level (based on location) and can impose a cap on the home’s price, too. Ask your lender about these programs to see if you qualify.
A mortgage pre-approval doesn’t mean things are set in stone. Lenders will recheck your credit, bank statements, income and employment just before closing to make sure you are still able to handle the repayment. So going out to buy any new purchases, like a new car are a big no no. Even taking out a new line of credit is bad and can stop or delay the closing of your purchase.
Buying a home will be the biggest purchase you make in your lifetime, so make sure you do your due diligence and don’t get disheartened with the market. The market is always changing, so make sure you have the right people in your corner to walk you through the steps.
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