If one of your financial goals is buying a home this year, the time to act may be sooner rather than later. After raising interest rates last December, the Federal Reserve is expected to implement three additional rate hikes in the coming months. At the same time, home values are projected to rise by 3.5 percent through the end of 2017, according to Zillow.
What does that mean for prospective buyers? Snagging your dream home may be more expensive. Having a great credit score can help keep the interest rate you pay on a mortgage low but that’s only one part of the equation. There are a number of things you need to keep in mind if you’ve got your sights set on becoming a homeowner this year.
1. Set your budget first
One of the worst mistakes prospective homebuyers make is jumping into the market without having a clear of idea of what they can actually afford. What inevitably happens is they find a home they love and end up taking on a bigger mortgage than they need, putting a major strain on their finances in the process.
Before you start browsing online listings or heading out to open houses, crunch the numbers to see what a reasonable mortgage payment really is. This is where it’s important to keep those interest rates in mind.
Let’s say you make $55,000 a year, you spend $250 a month on your other debt payments and you have $20,000 for a down payment. Assuming you qualify for a 30-year, fixed-rate loan with a 4% APR, you’d hypothetically be able to afford a home worth $202,000. If rates were to go up, however, and you now qualify for an APR of 4.25%, you’d be looking at a home worth $197,000 instead.
Running the numbers is important because you don’t end up with an oversized mortgage. Buying too much home could put your financial security in jeopardy if your income goes down or you’re temporarily out of work and you can’t keep up with the payments.
2. Take a close look at your credit
Your credit history plays a big part in determining whether you get approved for a mortgage. Lenders have been loosening up credit restrictions in recent years, with 77% of all purchase loans closing in December 2016, but you still need to mind your p’s and q’s where your credit is concerned.
Checking your credit reports is a good place to start. Review them for any errors or inaccuracies, as well as any signs of potential identity theft. If you spot something that’s incorrect, you have the right to dispute it but proceed with caution. Mortgage lenders may put the brakes on a loan approval if you have one or more open disputes on your credit report.
If your score is below the 620 mark, which is the minimum score needed to qualify for a conventional loan or an FHA loan with a 3.5% down payment, take a look at what could be dragging it down. Late payments or a high utilization ratio may be the worst culprits. If so, work on paying down your balances and make a point of paying on time each month to establish a positive payment history.
3. Work on saving your down payment
For a conventional loan, the standard down payment has traditionally been 20% but it’s possible to buy a home with less. With FHA loans, for example, the down payment is set at 3.5% for creditworthy borrowers. A USDA loan, on the other hand, requires no down payment if you meet certain income and credit guidelines.
If you want to buy a home sooner rather than later, that may mean offering up a smaller down payment. While that’s not a barrier to loan approval, there is a financial catch. If you’re putting less than 20% down, private mortgage insurance (PMI) will be tacked on to your loan. This is the lender’s insurance policy against default and it can add to the cost of your monthly payments, which is something you’d need to factor into your home-buying budget.
4. Shop around for the best rates
According to the Consumer Financial Protection Bureau, nearly half of homebuyers don’t take the time to scout out the best deal for a mortgage. That’s a mistake you simply can’t afford to make. With rates rising, it’s more important than ever to look at what different lenders are offering to see who’s got the best terms.
With a $200,000 loan, for example, an interest rate of 4 percent would mean paying nearly $143,000 in interest, assuming a 30-year term. Bump the rate up to 4.5% and the interest total climbs to more than $163,000. If you’re not putting in the effort to find the lowest rate you can qualify for, you could end up paying a lot more for a home than you need to.
5. Get pre-approved if possible
While you’re comparing rates, it’s to your advantage to get pre-approved for a loan if you can. A pre-approval doesn’t mean that your mortgage is set in stone but it shows sellers that you’re coming to the table ready to buy. If you get locked into a bidding war, your pre-approval letter could be your ace in the hole if the other buyer’s financing is called into question.
6. Be prepared for competition
After years of steering clear of the housing market, the tide is set to turn in 2017 as more millennials venture into home-buying. Housing inventory has been on a downward slide since September 2016, meaning there are fewer homes for sale. With more buyers flooding the market and supply falling below demand, you’ll need to stay on your toes if you want to land a home.
That doesn’t mean you should rush into buying but you should be planning out your strategy well in advance. Give yourself time to clean up your credit reports and get your down payment together. In the meantime, you can be taking the temperature of the market in your area to gauge how likely you are to be competing with other buyers and how home prices are trending. The more research you do beforehand, the smoother your home buying experience is likely to be.
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