Is 2016 the year? Five Things to Do Now to Be Ready to Buy a Home
If you are planning to buy your first home in 2016, you can expect to encounter competition for limited inventories of affordable homes, lending standards that are so strict that only 55 percent of applications for mortgages to buy homes were approved last year,
Most forecasters expected mortgage rates to rise next year, and end up between 4 and 5 percent. Some have made the same prediction or the last two years, only to see rates drop below 4 percent this year. However, the improving economy makes higher rates only a matter of time. The longer you wait to buy, the higher the interest rate you will likely pay
The same is true of home prices, to some extent. Prices will end up 5 to 7 percent higher at the end of this year than they were a year ago. Economists expect increases to continue, but at a slower rate next years. Price increases vary greatly by market and by price tier. Hotter markets like Denver or San Francisco are seeing double digit appreciation this year and the hottest segment of their markets are lower tier starter homes. On the other hand, great bargains on entry levels hokes can be found in slower markets in the Midwest and Eastern markets like Cleveland, Philadelphia, Baltimore and Trenton.
Here are five things you should be doing right now to get ready to buy a home in the spring.
Clean up and manage your credit.
Your credit score will not only determine whether or not you qualify for a mortgage but it will also determine you interest rate. Taking control of your credit today can save you tens thousands of dollars in the future. Get your credit history and go over it carefully to see if there are any errors. Stop buying on credit and live on a cash basis. If you have accounts you never use, close them, but don’t close the account you have had the longest. Pay all your bills on time.
Reduce your debt.
Pay off your smaller credit balances and pay down your larger ones. Do not make any large purchases on credit until after you have closed. The median debt to income ratio for all loans currently 25 percent of take home income. How does your compare?
Put together your down payment and closing costs.
Down payments vary by loan program. VA loans for veterans have no down payment requirement at all. FHA loans require only 3.5 percent down. Conventional loans may require up to 20 percent down. Many state and local housing authorities offer loans with no or very low down payments requirements. Do some research to find the best option for you. In addition to your down payment, you will need cash for closing costs—which will run about 5 percent of the cost of the home.
Get documentation together.
Tell your employer you will he applying for a mortgage so that they will be ready to provide proof of employment. It you are self-employed; you may need tax returns for the previous three years. Have documentation for your monthly deft payments and be ready to support any asset or source of income like dividends, alimony, trust fund, etc.
Figure out what you can afford and stick to it.
Use a mortgage calculator to find out what your monthly payment will be at various home prices. Add together your existing debt payments to your monthly mortgage payment and divide the result into your monthly gross income. That number is your debt-to-income ratio. Currently, the median DTI that lenders are approving is 28 percent for FHA loans and 23 for conventional loans. If your DTI is significantly higher than these medians, take a hard look at your proposed house payment and see if you can lower it. When you have sharpened your pencil and settled on a ceiling price that you will pay, stick to it.