money 10 steps you should take if you want to buy a home in 2020
This year, homebuyers again will face a low inventory of for-sale homes and other competitive buyers. On the plus side, mortgage rates remain low.
If you’re ready to jump into the house-hunting fray in 2020, there’s no reason to be discouraged. Instead, be buyer-ready with these 10 tips from real estate experts.
Step 1: Make sure the time is right for you.
The first step in the home search process is to decide whether you plan on staying in a location for a long time. If you don’t plan to remain in one place for more than three years, renting may be a better option financially.
A more sensible option may be to focus on building your savings and not spend that money on a 20% down payment, said Pava Leyrer, chief operating officer at Northern Mortgage, a Michigan mortgage lender.
Step 2: Try out the area.
Visiting the neighborhood where you want to buy a home a few times simply isn’t enough, said Ralph DiBugnara, president of Home Qualified, a web series that discusses real estate trends. Instead, live there for a while without fully committing by renting short term, he said.
“Take the public transportation before you move and see what shops are around,” DiBurgara said. “If you look on Google maps, you don’t know if you’re going to stand in the cold for 20 minutes unless you do it.”
That could help new homeowners avoid buyer’s remorse. Three-quarters of homeowners had at least one regret about the house they bought, according to a recent Zillow survey, while nearly a fifth said they felt rushed into the decision without evaluating all their options.
Step 3: Do your own research, too.
While the vast majority of homebuyers use a real estate agent to buy a home, it still pays to do your own home-hunting research on the side. That’s because some agents may steer you from houses that offer lower commissions to the buyer’s agent, even if they aren’t supposed to.
“If you actually sign a buyer agency agreement, they have a fiduciary duty to you to show all the available homes,” said Guy Wolcott, founder of mobile real estate company Homesnap.
Still, the practice occurs.
Properties with lower commissions to the buyer’s agent are five times less likely to sell and take 12% longer to do so, according to research cited in a recent report from the Consumer Federation of America, a consumer advocacy organization. The CFA itself found similar attitudes among agents it interviewed for the report.
Step 4: Follow up with the seller.
It’s not enough to just do your research before checking out a property. A small gesture after a house viewing can make all the difference.
“You are in a competition. Write a short and sincere letter to the seller that’s not desperate,” said David Meck, a real estate broker at Keller Williams Arizona Realty Meck. “If there are 10 offers, that will [help] the buyer if there’s a personal connection.”
Something as simple as emphasizing the value of a school district – if you’re a parent – could help your case, Meck said, though it’s not guaranteed.
Step 5: Add up your down payment.
While you don’t need a 20% down payment to purchase a home, it pays to have as much as you can to lower your monthly payment and get better terms.
Use a year-end bonus toward the down payment, Leyrer suggests, or try asking family for a one-time gift. If you’re getting married, set up a registry dedicated to down payment funds.
Homebuyers should be ready to disclose where these funds came from, so their lender doesn’t raise any red flags. Lenders may not only require proof of bank deposits, but they may also want a letter signed by the giver that the gift does not need to be repaid.
“If your employer gives you a regular $5,000 bonus, that’s going to make a big difference in buying a home,” Leyrer said. “[But] you’ll have to show us your check stub.”
There are also downpayment assistance options at the state level for first-time homebuyers. New York has its HomeFirst down Payment Assistance Program, which offers up to $40,000 towards the down payment or closing costs of a home. To apply, buyers must complete a homebuyer education course and agree to live in the home for at least 10 years.
Step 6: Know your mortgage options.
Even if you can’t get your down payment to 20%, home loan programs through Fannie Mae, Freddie Mac, and the Federal Housing Administration offer mortgages with as little as 3% to 3.5% down.
But a lower upfront down payment usually means a higher monthly payment. You may also be required to purchase mortgage insurance to protect the lender in case of default.
“Most people don’t account for insurance on a FHA loan,” said Scott Sheldon, branch manager at New American Funding, a mortgage lender. “They should plan and account for [an extra] 0.7% of the loan amount.”
The only exception is a mortgage backed by the U.S. Department of Veteran Affairs. These home loans don’t require mortgage insurance or a down payment.
Step 7: Find out your credit score.
Your credit score will help determine what interest rate you get. The higher your score, the lower the rate you have to pay – meaning a more affordable monthly mortgage payment.
For instance, if your credit score is between 620 to 639 you would pay 4.99% in interest on a $216,000 mortgage with a monthly payment of $1,158, according to calculations from FICO. If your score is between 760 and 850, your rate would be 3.4% with a $958 monthly payment. That’s a difference of $200, or $2,400 a year
If you don’t plan to purchase until later in the year, it makes sense to take steps to improve your credit score by paying down debt, making timely payments, and correcting any errors on your credit report.
But if you’re buying sooner, there are options for those with lower credit scores. For instance, borrowers with a credit score as low as 580 can qualify for FHA-backed mortgages, Sheldon said.
Step 8: Factor in closing costs.
When it comes to home purchasing, there are costs you have to consider besides simply the price tag – namely closing costs.
“Depending on the house you’re trying to buy, closing costs of 2% on a $400,000 home could mean another $8,000 outside of your down payment,” Sheldon said. “A lot of families don’t budget that 2% of the purchase price.”
There are workarounds. Buyers can negotiate that sellers pay the closing costs for them, Sheldon said. Or, buyers can include the closing costs into the loan balance and pay it back in their monthly payments.
“There is a negligible difference between a $408,000 purchase and a $400,000 purchase as the monthly payment difference is probably only around $2,” Sheldon said.
Step 9: Shop around for a mortgage.
To get the best interest rate, look at all your options. Don’t just go to your bank without checking with online lenders, credit unions, and mortgage lenders.
Make sure to read the fine print of each loan offer and compare each against each other to get the best deal. Don’t just fixate on just the interest rate; compare the other costs.
A mortgage broker can help you get multiple mortgage offers, and, in some cases, the best deal, said Mat Ishbia, president of United Wholesale Mortgage, a mortgage lender.
"[Mortgages] through a broker are like Sherman Williams Paint,” Ishbia said. “I can get paint but my contractor will get it for 40 bucks through a bulk discount."
Step 10: Don’t do these three things.
Take on debt: If your monthly debt payments are too high versus your monthly income, you may not qualify for a mortgage. Taking on any additional debt – such as running up your credit card balances or getting a car loan – could ruin your mortgage application.
Job hop: You should be in your current job for two years before applying for a mortgage. If you plan to move into a new job, it’s best if it’s a higher-paying one.
“If we see progression of income it makes sense, because what they’re doing is in their benefit,” Leyer says. “If we see a drop, then there’s an indication there’s a problem.”
Get emotional: Even if you have your eyes set on a particular home, it may not be the right one for you.
“If something came back in your inspection or if there are zoning concerns, I’d walk away,” Leyer said. “It’s better than getting into a $300,000 home and having no recourse.”
Dhara is a writer for Yahoo Finance. Follow her on Twitter @dsinghx.
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