Whether you’re a first-time buyer eager to become a homeowner this year, or you’re ready to leave your Seattle condo for some acreage in Dallas, buying a new house is an exciting time. However, it can be a lengthy and tricky process, even for the most seasoned homebuyer. From getting pre-approved to submitting an offer, navigating the home buying process can seem daunting. So to help you score your dream home this year, we’ve put together a guide that dives into what you need to buy a house in 2022.
What to expect for the 2022 housing market
The U.S. housing market had a record-breaking year in 2021. It remained a competitive seller’s market, mortgage rates hit record lows, and there was more interest in relocating to new cities across the country than ever before. As we enter the new year, the housing market has already started off with a record-low number of homes for sale. However, the good news is we’re predicting a more balanced housing market in 2022.
As you prepare to buy a home this year, it’s important to familiarize yourself with how the market is predicted to move so you can decide when the best time will be for you to buy a house.
The homebuying season will begin by late January
The homebuying season typically begins in the late spring, but it’s expected to start much earlier this year. Buyers are looking to take advantage of record-low mortgage rates before they rise later in the year.
Expect a more balanced market, but not necessarily a buyer’s market
If you began your home search last year, you’ve likely noticed that it remains a competitive seller’s market with a limited selection of homes. Luckily, in 2022, buyers can expect more selection and slower home price growth with a much-needed increase in new construction homes toward the second half of the year.
Mortgage rates will increase, which will slow down home price growth
Redfin expects 30-year fixed mortgage rates to increase to 3.6% by the end of 2022. This increase combined with higher home prices will likely slow home price growth to 3%, which is great news for buyers – especially first-time homebuyers that may have feared another year of increased home price growth.
Is now a good time to buy a home?
Whether or not it’s a good time to buy a home will depend on where you’re looking to buy and, of course, your individual situation. For homebuyers looking to take advantage of lower mortgage rates before they rise, now may be the best time for you to buy a home. However, if you want a wider variety of homes to choose from, it could be wise to wait further into the year. To best prepare yourself for the 2022 homebuying season, read on to find out what you need to buy a house this year.
Here’s what you need to buy a house in 2022:
1. Start by checking your credit score and, if necessary, improve your credit health
Before applying for a loan and certainly before making an offer on a house, you should know your credit score. Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will loan you. There are several websites you can use to check your credit score, here are a few to consider: TransUnion, Equifax, Experian.
If you’ve realized your credit score isn’t as high as you had expected, don’t worry. There are a few things you can do now that will help raise your credit score so you can capitalize on a better interest rate.
Pay your bills on time
If you tend to be late on a bill here or there, what you might not know is that you’re negatively impacting your credit. Start paying your bills on time, now. Set up automatic payments or set reminders, but make sure you can meet the due dates for all your bills going forward. Establishing a history of paying your bills on time is paramount in raising your credit score.
Pay down the debt on your credit cards
One of the biggest contributing factors to your credit score is a credit utilization ratio. This ratio is determined by taking your average expenditures on all your credit cards each month and dividing them by your total credit limit. Lenders want to make sure you’re not close to maxing out your credit cards and prefer to see a credit utilization ratio of 30% or less.
Don’t apply for new lines of credit or close old ones
Opening new lines of credit is not going to help you increase your score, and in many ways, it can do the opposite. Applying for new credit cards produces unneeded hard inquiries into your credit history, which also negatively affects your credit. Closing unused credit cards can also have negative consequences as this shows that you’re limiting the credit available to you, increasing your credit utilization ratio.
Have a credit report company dispute inaccuracies for you
After you get your credit report, you may notice several inaccuracies that can be dragging your credit score down. The good news is that you can dispute these errors, and a professional can help get them wiped from your credit report so your credit score can bounce back.
2. Have a healthy debt-to-income ratio (DTI)
Another key component banks consider when issuing loans is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn.
So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but no more than 43% or you may not qualify for a loan at all. There are two DTIs to consider as well.
The Front-End DTI: This DTI typically includes housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.
The Back-End DTI: This DTI includes all other debts you may have, such as credit cards or car loans. You want a back-end DTI of 36% or less. A simple way to improve this DTI is to pay down your debts to creditors.
How do you calculate your DTI ratio? You can use this equation for both front-end and back-end DTIs:
DTI = total debt / gross income
3. Calculate how much home you can afford
The best way to determine what you need to buy a house is to figure out how much house you can afford. Though online calculators don’t necessarily account for all of your monthly expenditures, they are a great tool for understanding your larger financial situation.
After you figure out what you can comfortably afford, you can start your online search for houses and begin to narrow down which home trends are most important to you. Are you looking at specific neighborhoods? How many bedrooms do you want? Do you need a large yard, big deck, swimming pool, man cave, she-shed, etc.?
Understanding what you can afford in the area you want to buy will help keep you grounded and focused on what you want in a house versus what might be nice to have.
4. Save for a down payment
Unless you want to pay Private Mortgage Insurance (PMI), you’ll want to save up for a sizable down payment. PMI is an added insurance charged by mortgage lenders to protect themselves in case you default on your loan payments. The biggest problem with PMIs for homeowners is that they usually cost you hundreds of dollars each month. Money that is not going against the principal of your mortgage.
How much should you save for a single-family home? Twenty percent down is typical for most mortgages to avoid paying for PMI. However, other types of home loans, such as FHA-backed loans, Conventional loans, and VA loans if you have served in the military and qualify, may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower rate that will save you tens of thousands of dollars in interest over time. Learn more about how to save for a downpayment and start saving now.
5. Build up your savings
Banks like to see a healthy savings account and other investments or assets (i.e., 401k, CDs, after-tax investments) that you can tap into during hard times. A healthy savings account and other investments are a good idea in general as they will help you establish your future financial independence, but it’s also a necessary item on your checklist of what you need to buy a house in 2022.
6. Budget for closing costs and other additional expenses
When deciding what you need to buy a house, keep in mind that there are a lot of little costs that are often overlooked, especially if you’re a first-time homebuyer. Though some costs can be wrapped into a home loan and monthly mortgage payment, such as sales tax and home insurance, there are several other costs that cannot be included in the home-buying package and need to be paid for out of pocket.
These items can range in price depending on the area, size, and cost of the house you’re buying, here is a list of extra costs you should consider (not all-inclusive):
- Home appraisal fee
- Home inspection fee
- Geological study
- Closing costs*
- Property taxes**
- Home insurance**
- Utility hookup/start fees
- Home remodeling/updating expenses
- Existing propane gas
*Closing costs can sometimes be wrapped into the home loan, depending on the agreement with your lender.
**Property taxes and home insurance can be paid separately, or your lender could include them in your monthly mortgage payment.
7. Solid employment history
If you haven’t gotten the picture yet, mortgage lenders like consistency, and that includes your employment history. Lenders like to see a borrower with the same employer for about two years.
What if you have a job with an irregular or inconsistent pay schedule? People with jobs such as contract positions, are self-employed, or have irregular work schedules can still qualify for a home loan. A mortgage known as a ‘Bank Statement’ mortgage is becoming rapidly popular as more self-employed, or what has been referred to as the ‘gig economy,’ has taken off. Learn more about how to get a mortgage without a full-time or permanent job.
8. Know the difference between a fixed-rate and an adjustable-rate mortgage
The difference between these two types of mortgage rates lies within their names. A fixed-rate loan is exactly that, an interest rate that will never change the moment it’s locked in. You will pay the same amount the very first month you pay your home loan and will continue to pay that same amount over thirty years (or however long the loan term is). You will only see slight fluctuations in your monthly payment if you have your property taxes and home insurance wrapped into your mortgage since those change annually.
An adjustable-rate mortgage (ARM) is typically a mortgage that starts at a lower rate than fixed interest rates but is adjusted each year, typically resulting in a higher rate than a fixed rate after a given period of time. For example, a 5-1 ARM is a popular mortgage offered by lenders, which is a hybrid between fixed and adjustable-rate mortgages. Your mortgage would start at a lower fixed rate for the first five years, and then after that time has elapsed, the rate would then be adjusted on an annual basis for the remainder of the loan term.
You can use a mortgage calculator to get an estimate of what your monthly mortgage payment might be using either of these types of rates.
9. Be sure to follow interest rates
It’s important to know what interest rates are doing. The big question is are they on the rise or are they falling?
When the economy is good, the Federal Reserve typically raises the interest rate to slow down economic growth to control inflation and rising costs. When the economy is in the dumps, they do the exact opposite. They lower the interest rate to entice more people to make larger purchases that require loans (i.e., land, cars, and houses) to help stimulate the economy.
If you know what you need to buy a house, then it’s a good idea to know how the overall economy is doing, and more importantly, how it’s impacting the rates you’ll soon be applying for. But why are small hikes in interest rates so important to you? To put it into perspective, even a one percent increase in your rate on a home loan is the difference between paying or saving tens of thousands of dollars in interest payments on your home loan over time.
10. Understand how long it takes to buy a house
First-time homebuyers don’t often understand how long it takes to become homeowners. The homebuying timeline is time-consuming from start to finish and relative to individual circumstances and the housing market in your area. However, there are some general universal constants that you can expect when determining just how long it takes to buy a home. For example, a cash offer on a house is usually much quicker than a traditional loan, and if there is a perfect house in a good neighborhood and at a great price, you better expect competition and the likelihood of a bidding war.
Depending on the housing market in your area and possibly which season you’re buying in, it can take you a couple of weeks to find a home or more than a year. But after you find your home, you can typically expect the entire process from making an offer on a house to walking in its front door, to be as little as a few weeks to a couple of months on average.
11. Find a knowledgeable real estate agent
There are several ways to find and choose the right real estate agent for you. Many people rely on recommendations from friends and family, while others look to online reviews. While both of these scenarios work well and can land you a great real estate agent, the reason these agents rise above the others as the best of the best is because of their intentions.
A good agent isn’t trying to get you into a house as quickly as possible so they can earn a commission. Instead, you want an agent that will act as your guide through the home buying process while having your best interests in mind. A good agent will be able to tell you what you need to buy a house, and if they think a house is a good fit for you, or if you should keep looking. They should be expert negotiators and guide you through all the questions you have when buying a house.
12. Find a mortgage lender
There are a few things to keep in mind when searching for a mortgage lender. The first thing that comes to most people’s minds is what mortgage rate they can get. You may have to shop around to find the best rate because the lower the rate, the more money you save, or the more house you can buy.
Secondly, how does that mortgage rate compare to other lenders? By looking at online reviews, you can usually establish a theme pretty quickly of the strengths and weaknesses of the lender and what you can expect for a level of service down the road.
Ask the lender what their average length of time is to close on a house after the offer has been accepted? A good lender versus a bad one can be the difference between moving into your new home two to four weeks earlier. You want to find out how streamlined their processes are.
Finally, figure out what type of loan is right for you. Should you go with an FHA, Conventional, or VA loan? Each situation is different, so it’s best to ask and have a game plan.
13. Get pre-approved for a mortgage
When getting pre-approved, you should be aware of a small but relevant difference between the typical fast pre-approval for a home loan versus an underwritten pre-approval.
The fast pre-approval usually encompasses a credit report and a loan officer review and can be done in less than a couple of hours. This basic mortgage pre-approval allows you to quickly know how much you can afford and then make an offer on a house that may have just come on the market.
The underwritten pre-approval usually takes about twenty-four hours and includes a credit report, loan officer review, underwriter review, and a compliance/fraud review. Though this process takes longer, your offer on a house is stronger. Eventually, if you’re planning on buying a house you will have to go through the underwritten pre-approval process anyway, so it’s better to jump on it from the start.
14. Research different neighborhoods and areas
There are many variables to think about when deciding where you want to buy a home. The key to beginning your research is to determine the variables that are most important to you. Are you looking for a good school district, a large single-family home, a fixer-upper, convenience to commuter options, a specific neighborhood that ranks high on Walk Score, a condo in the city?
Your real estate agent will most likely tell you to create a list of your “must-haves” for a house versus the extra features you would like to have, but wouldn’t necessarily deter you from a house if they weren’t there.
Your list will help your agent narrow down the number of houses they’ll show you, saving you time by only showing you houses you’d be interested in.
15. Shop around and make an offer on the home
Now that you know what you need to buy a house, have determined where you want to live, and have been pre-approved, the fun begins – house hunting. Once you find the house you know would be a great fit for you and your family, you’ll want to be ready to make an offer.
There are numerous variables to consider and your real estate agent will help you through this process. Understanding the condition of the US housing market, looking at real estate comps to determine how houses have been selling in the neighborhoods you’re looking into and at what price (above or below asking), and knowing if there are often other competing offers will help you assess and determine how you’d like to make your offer when the time comes.
Negotiating an offer on a house can be emotionally taxing. It’s important to do your research and rely on your agent’s advice so you can come to the table prepared.
16. Get a home inspection
Now that the sellers have accepted your offer, it’s time to get the home inspected to make sure there are no underlying issues that could cost you money down the road, such as a leaky roof or issues with the electrical wiring. Usually, a home inspection is a contingency built into the initial offer and your real estate agent can help you set this up. However, it’s recommended to hire an inspector that is certified by a national organization (such as ASHI or Inter-NACHI). Though you can waive this contingency if you’re trying to make your offer more competitive in a hot market, be aware that you may be taking on considerable risk if you do waive a home inspection contingency.
There are several types of home inspections, but a general home inspection involves a certified inspector that will go in, around, under, and on top of your house looking for anything that could be of concern, such as structural or mechanical issues. The inspector will also look for safety issues related to the property. Though they will go into crawl spaces and attics as part of their inspection, they will not open walls. They will inspect the plumbing and electrical systems and should point out any defect in the property that could cost money down the road for the homeowner or cause harm.
Once their inspection is complete, they’ll put their findings into a written report for you with pictures, which basically becomes a miniature instruction manual for your house. No house is perfect, but the report will give you a great snapshot of the property at the time of the inspection. If there are fixes that need to be addressed, this report will certainly let you know.
You should also know that the sellers are not required to make any repairs to the property. However, you can request them through your agent, which will let you know what repairs are reasonable or not.
17. Have the home appraised
Home appraisals are an important part of the homebuying process. House prices can quickly skyrocket when the housing market is hot, and lenders typically will not loan out more money than what a home is worth. A home appraiser will not only tell you what the home is worth for the area and the current housing market, but the appraisal will also directly affect the size of the loan the lender will give you. Your mortgage lender will usually set up the home appraisal so you can take this time to focus on the next task at hand.
If the home appraisal comes back and states that the house is worth $300,000, but you made an offer of $310,000, the bank will most likely only lend you $300K. You will then either have to pay the additional $10K out of pocket or try to renegotiate with the sellers to see if they would be willing to lower the price.
18. Close the sale and sign the papers
Your real estate agent should help you map out the last details, such as when and where you should sign all the papers to take ownership of the house and, of course, the handing over of the keys. Be sure you come to closing prepared to pay closing costs and have any needed documents. Congratulations, you’re a homeowner!
The post What You Need to Buy a House in 2022 appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.
from Redfin | Real Estate Tips for Home Buying, Selling & More https://ift.tt/2Un9zNa
No comments:
Post a Comment