The past year was a mixed bag for first-time home buyers. Remarkably low mortgage rates improved affordability and inventories of homes for sale in most markets during the first half of the year. But as demand responded through the summer months, the chronic drought of homes for sale once again raised its evil head. Through the second half of the year, shrinking supplies of listings and rising prices made it tough on buyers.
Will conditions for first-time buyers be any better in 2020? Could this be a good year for you to make the leap to homeownership?
Forecasting the future in real estate trends is always risky. More than a few housing experts have been wrong recently on mortgage rates, inventories, consumer sentiment and price appreciation. Still, they’re a good reason to expect conditions for first-time buyers will be better this year.
The average price increase for 2020 forecasted by more than 100 housing economists was only 2.8%, significantly lower than 3.64% in 2019. Interest rates are expected to remain at or below 4%, according to forecasts from Fannie Mae and Freddie Mac. Though the median home price was $270,900 in October, starter homes range from $100,000 to $200,000 depending on the market.
If you are one of the nearly 20 million or so millennials who would like to buy, but are stuck renting, the best time to shop for a home will be in the spring when most sellers list their homes for the spring-summer sales season. New listings will continue through the summer months so you will only have a couple of months to get ready to buy.
Good Credit and Cash for a Down Payment
Failing to get approved for a mortgage when you have found a home to buy may keep you renting for at least another year. Only about half of all mortgage applications to buy a home were approved at the end of the third quarter last year and their median FICO score was 737. If your score falls below that number, you have some work to do to raise it. Buyers with higher FICO scores also will get lower interest rates.
Concentrate on reducing your debts, especially credit card and charge account debts. You will improve your score and your debt-to-income level, which is a critical factor in getting approved for a mortgage.
Reduce living expenses to save more for a down payment. Ask your family for cash gifts instead of birthday or Christmas presents. If you have an IRA or 401k retirement plan, borrow against your accumulated savings.
You will also need a low down payment loan. Last year the average first-time buyer put down only 6%. There are thousands of low down payment loans available and few have any income limitations. Down Payment Resource lists more than 2400 choices. The median price for a single-family home was $273,600 in October and starter homes go for $100,000 to more than $300,000 depending on the market.
Finally, you will need cash for closing costs. You may have as little as six weeks between the time that your offer is accepted and closing. Closing costs, including appraisal, inspection, title, settlement, will run about 5–7% of the home price.
Ten Tips for First-Timers
- Get yourself a good agent. Having an agent usually doesn’t cost buyers any more than not having one, since in most sales buyers’ agents receive a cut of the seller agent’s commission. Shop around and fine someone expert in your local market and experienced working for buyers.
- Spend some time surfing the Homes.com site to familiarize yourself with its intuitive features.
- Make a shortlist of “must-have” requirements such as location, house size, lot size.
- Work with your agent to create a budget that you can afford. Be sure to include taxes, insurance and maintenance costs. Stick to it. Buying a home that you can’t afford is worse than not buying one because you can become trapped in a mortgage that will leave your family “house poor” for years.
- Explore neighborhoods you have not considered to expand the number of homes that will fit your budget. Accept the fact that you may have to make some concessions to find a home you like.
- Get pre-approved for a mortgage so you can move quickly when you find a home that you like. Do NOT increase your budget to reflect the maximum a lender will lend you. The amount you borrow will increase the interest you pay and your monthly payments. It will also reduce the chances of getting approved.
- From your home inspection, identify problems with the home that you can live with for a while or fix yourself. Get estimates on the cost of repairs and negotiate with the seller to lower the home price to reflect the costs you would have to pay to fix them.
- Don’t get trapped into a bidding contest with another buyer that drives you over your budget.
- Don’t give up after one or two bad experiences. Learn from them. The right home for you may be right around the corner.
- As the season winds down and prospects seem to disappear, you may reach a point where it makes sense to postpone your home search until next year. Use the time to increase your down payment savings and improve your credit to improve your chances in the coming year.