Are you planning to take the homebuying plunge in 2021?
With historically low mortgage rates expected to continue, it’s shaping up to be your year.
But first, there are a few steps you should take to get your plans and finances in order so that when the right home comes along, you’re ready to confidently make your move.
Read on for 6 New Year’s Resolutions to make right now if you’re hoping to take the mortgage plunge.
Unless you’re a Veteran planning to use a VA Loan with 0% down (thank you for your service!), you’ll need to set aside funds to cover a down payment and estimated closing costs. If you’ve already started on this, fantastic! If not, that’s OK! There are lots of ways to begin saving and sticking to it.
While it’s not always necessary (or do-able) these days to put down the traditional 20% of the purchase price of a home, even low down payment mortgages require an average 3% down along with good credit. If you’re looking at a $250,000 home, for example, that’s $7,500.
You can expect the average closing cost amount to run 1 to 1.5% of the purchase price when using a mortgage broker to 2% with a mortgage banker. See average figures by state here. Closing costs include required fees such as title insurance, appraisal, settlement fee, home inspection fee, and lenders’ expenses paid at closing.
The easiest way to start saving is to create a budget and take a long, hard look at your spending. More on this in #6. Find ways to pare down expenses and cut services that aren’t necessities. Open up a dedicated savings account and set up automatic savings transfers or deposits into the account so that the act of saving becomes second-nature.
Saving for a down payment and closing costs can take 6 months or more for the average family, so be patient and stick with it.
When readying to buy a home, it’s important to keep your debt-to-income ratio (DTI) in check. This figure refers to your minimum monthly debt payments divided by your gross monthly income. A DTI of 36% or lower is the sweet spot. Anything higher, and it may be harder to qualify for a mortgage.
There are a few ways to improve your DTI. An easy way to start is to pay down your debt, whether it includes an auto loan, student loans, or consumer debt, through the debt snowball method. This strategy involves paying off your debts from smallest to largest, and once the smallest debt is paid off, applying the previous debt payment debt to your next largest debt and so on.
Paying down your debt and making payments on time can also help improve your credit score. Make a point to check your credit score from one of the three major credit bureaus to see what range you fall in. Then take additional steps toimprove your credit score if necessary.
Determining how much house you can really afford versus pulling a number out of thin air is something that can only be accomplished by finding a lender and getting pre-qualified. The mortgage pre-qualification process takes into account your income, your DTI, your credit score, and a range of other financial considerations to determine how much you’ll qualify for. Going through the process with a trusted lender can also help you determine the type of loan program that makes sense for your financial situation.
Plus, with low housing inventory in many cities – and a good chance you might find yourself in a multiple offer scenario – getting pre-qualified can set you apart from other buyers. When the right house comes along, you’ll already be in a position to make an offer with your financing details worked out, which can help put sellers at ease.
Soon after finding a lender and securing a mortgage pre-qualification (or even at the same time!), you should find a trusted realtor. Look for a realtor whom you don’t just share a good rapport with, but someone who knows your local market and has firsthand knowledge of recent home buying and selling trends in your city.
They can advise you on the ins and outs of the homebuying process as well as predicted trends locally for 2021 and beyond. Ask family members, friends, or colleagues for a recommendation. You can also ask your lender, who may have working relationships with reliable realtors in your city. And if you find someone you like, but aren’t yet sure they’re ‘the one,’ know that you can ask to speak with previous (hopefully happy) clients to learn firsthand what it’s like to work with them.
If you don’t know what you’re looking for in a house, now is the time to determine your wants and your needs. Which neighborhoods do you love? How large of a home do you need? Do you have any must-haves and an upgrade wishlist? Take a little time to do your own research into locales, neighborhoods, previously sold homes in those neighborhoods, median listing prices, and median sold prices. Your realtor can and should provide you with previously sold statistics.
Additionally, be prepared to prioritize. A low inventory market means you may not get everything you want in a home, but you can find a home that checks off most of your boxes.
As you move into the new year, it’s a good time to create or revamp your monthly budget – both to aid in saving to buy a home and to make sure you’re living within your means. Take a look around online and you’ll find any number of home budgeting worksheets available for free as well as savings plans, checklists, and financial health checks for the New Year.
It’s important to know your income numbers, track your spending, and look for ways to free up funds to help you achieve your new home savings goal. This will also help you plan and save for supplementary homeownership costs, such as moving costs, homeowner’s insurance, flood insurance if needed, a home warranty if you’ll be using one, and others.
I’m a mortgage broker licensed in Arizona, Florida, California, and Colorado and I can help you determine the right loan program for your financial needs. I can also help you determine your readiness to buy a home and help get you on a path toward your dream of homeownership. Connect with me at 480-313-7103 or firstname.lastname@example.org and let’s get started.