So, you’re finally ready to make the big leap and buy your first home? Congratulations! Homebuying can be both an exciting and stressful time filled with ups and downs, industry-specific terms, vendors, and an overwhelming amount of information being thrown your way. Even during the pandemic, buyer demand is surging since mortgage rates are about a full percentage point lower than they were a year ago, and the largest generation – millennials – are aging into their homebuying years. According to CNBC, that demand has pushed the supply of homes for sale down 8.5% annually to the lowest level since the Realtors began tracking inventory in 1982. The huge imbalance between supply and demand has caused the median home price in December to jump 7.8% annually, the biggest annual increase in almost four years. Needless to say, it’s a competitive market out there and the best way to prepare is to make sure you’re informed so you can make educated decisions that work best for you. It’s hard to know where to begin, but with this arsenal of tools, you’ll be closing on your new home in no time!
1. Educate Yourself
First things first, get comfortable with the process and know your rights. The U.S. Department of Housing and Urban Development’s website, has several resources for people thinking about buying a home, including information about predatory lending and your rights as a borrower. Don’t worry if these concepts seem intimidating at first – soon enough they will become part of your vocabulary.
A great way to brush up on your home-buying jargon is to bookmark a comprehensive glossary of terms that will explain everything from “earnest money” to “assumable mortgage,” and everything in between! Taking the time to educate yourself will make you feel more comfortable throughout the process.
2. Check Your Credit Score
It’s always a good idea to review your credit reports and scores periodically, even if you’re years away from shopping for a home and a mortgage. If you’re planning to buy a home this year, we recommend checking your credit reports and scores as soon as possible. Several websites, such as Experian and Credit Karma, offer a free credit score. These are great tools, since they also help you analyze your score and find ways to improve it.
The better your credit history, the more likely you are to receive a favorable interest rate on your mortgage. Lenders will use your credit reports and scores as important factors in determining whether you qualify for a loan, and what interest rate to offer you. If there are errors on your credit report, you may have trouble qualifying for a loan. So, don’t delay in checking your credit.
Shopping around for a mortgage is a good idea. But don’t drag it out too long. Inquiring for new credit – which happens every time you ask a lender to loan you money – can drag down your credit score. With that said, scorers like FICO know that smart consumers shop around for large loans like their mortgages, so they’ll ignore any inquiries made in the previous 30 days when calculating your score.
3. Know Your Budget
There’s no doubt about it, buying a house is a serious financial commitment. Understanding your purchasing power and knowing your budget upfront is essential to a smooth and enjoyable buying process. You don’t want to find yourself in the unfortunate situation of falling in love with your dream home that costs $450,000 and then finding out your maximum purchase price is $375,000. Avoid this heartbreak by using a mortgage affordability calculator and start your search off on the right foot.
“Concrete goals will help you keep financial decisions in check and figure out what sacrifices you’re willing to make in the short term to be more comfortable in the long term,” says Ted Beck, chief executive of NEFE.
4. Location Is Everything
By now we’ve all heard the old adage “location is key.” Yes, the home itself is important; its size, layout, and design are all integral to daily life. Even more important, however, is its location — does it back a busy street? Is there a park in the neighborhood? Is the home in a good school district? Are you close to shops and restaurants? All of these are important questions to ask yourself before you pull the trigger and submit an offer.
Your future home is part of a community and learning the lay of the land before you buy is essential. Trulia’s detail-rich map tool can help you search based on a property’s location in relation to hundreds of amenities. It’s a great way to explore new neighborhoods, especially now while we’re all stuck at home! Additionally, it’s important you educate yourself on all the particulars of your target neighborhood – things like crime rate, commute times, and any additional HOA fees and specialty taxes. Grant Long, senior economist for StreetEasy says, “Having an idea of the prices and types of homes that you’ll encounter will help you make more informed decisions, or help you redirect your search to new areas or new types of buildings if that becomes necessary to stay within your budget.”
5. Explore Loan Choices
Don’t wait until you find a home to start thinking about how to finance it. Take time now to explore your mortgage choices so that you’re ready when the right home comes along. Make sure you meet with lenders, ask questions and decide what kind of mortgage is right for you. Getting a pre-approval letter helps you show sellers that you are a serious buyer – but it doesn’t commit you to a lender.
Comparing two mortgages can be confusing. There are fixed rates and adjustable rates, or ARMs, which are priced very differently. You can take out a mortgage for 30 years or as little as five years (interest rates are typically higher the longer the term of the loan). Most buyers should look at fixed-rate mortgages and, indeed, the 30-year fixed rate mortgage is the most common kind of loan, by far. The Consumer Financial Protection Bureau offers a comprehensive list of the different types of loans to familiarize yourself with.
The kind of loan you choose affects the interest rate you can expect to receive. As a rule of thumb, when possible, you should put down a 20% down payment to avoid being charged a monthly premium for what’s called Private Mortgage Insurance, or PMI. Private Mortgage Insurance protects the bank in the event that you default on your loan and the value of your home declines significantly. In any case, it’s important to examine the pros and cons of this choice. Calculators like this one can help show you how your loan will amortize either way, which can be helpful.
Like any big project, a successful homebuying experience is all about getting the details right from start to finish. By utilizing all the tools out there you’ll be able to smoothly navigate the process, save money and, in the end, close the deal.