When is the Right Time to Buy a Home?

While we are in a hot seller's market, many buyers are struggling with low inventory, sky-rocketing prices, increasing interest rates, and inflation, leaving many discouraged and hopelessly convinced that now is not a good time to buy a home.

But, when is the right time to buy a home?

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Honestly, if you wait on the market to purchase your home, you'll be playing an eternal game of cat-and-mouse, always chasing the fluctuations and driving yourself crazy, waiting for just the right home and the right window of opportunity to make your purchase. So the answer to that question is "the right time to buy a home is once you are financially prepared to purchase." That can be anytime.

It is important not to base your decision on the market. Granted, you want to get the best value for the lowest price, but it's much like chasing the prices at the gas pump and waiting to fill your vehicle when the price hits a sweet spot. If you wait too long for "just the right moment," you may run out of gas, which means you'll be forced to pay a higher price than if you would have filled up two weeks ago! The same holds true in the housing market.

Truthfully, don't waste your time waiting on the market. You'll drive yourself crazy! The fact is, if and when you NEED to move, you're going to pay whatever price you end up paying whether the market is in your favor or not. This may be different for those who don't NEED to move, but rather desire there is a better mindset and way to prepare for the purchase of your next home. While most agents will start with the provocative question, "Are you qualified?" to determine if you are even remotely ready to buy, obtaining preapproval or prequalification isn't actually the first step or first box to check on the list of preparing for your home.

Of course, figuring out how you are going to finance your home will be the determining factor in how much home you can afford, there are a lot of steps required before you ever think about pre-qualification and approval. Download/Print the accompanying Homebuyer's Preparation Checklist HERE, and then follow the steps below to get yourself

Here are those steps:

Establish a Budget - If you don't already have a budget, you should create one. Click here for a simple Excel Budget w/ Sample. Determining how much home you can afford is a critical first step because you don't want to waste your time looking at homes outside your price range and affordability. Lenders will evaluate your debt-to-income ratio (DTI), which is your monthly expenses (debt) versus your monthly income. You can calculate your DTI by taking your total monthly bills divided by your total monthly income (of everyone who will be on the loan). Most loans require less than 40% DTI, which would be your maximum budget for a home.

Learn more about DTI and lender requirements, here.

Save for Your Down Payment and Closing Costs - Minimum down payments can be anywhere from 3.5% - 20% of the purchase price, depending on the loan. A good rule of thumb is "the more money you have for a down payment, the better." Although different loan types require different down payments - or not at all, such as typical VA loans - the fact is the more money you have to put down, the lower your monthly mortgage payments will be, the easier it will be to qualify for the loan, the lower your interest rate will be, the more likely it will help you qualify for other loans you may need in the future - such as a car loan, and it will typically save you from paying Private Mortgage Insurance (PMI), which is a fee you pay as part of your monthly payment if you don't have at least 20% down. Even with VA loans, it is a good idea to put something down, if you can.

However, the downside to trying to come up with 20% down is it may take you many years and delay your home purchase. And, it may feel like you're constantly chasing your home when the prices keep going up. The more the prices go up, the more money you have to put down! Take the average home price of $400,000 x 20% down = $80,000. That's a lot of cash to have to come up with! And not everyone can do that.

But, don't let that discourage you. There are other loans with much smaller down payments that you may qualify for. For instance, VA and USDA loans require no money down, but do have very specific criteria you must meet. FHA loans, which are the most popular type of loan, only requires 3 - 3.5% down, which makes it much more attainable for most people. Using the calculation above, that would mean instead of coming up with $80K, you would need to come up with around $14,000.

But the down payment is not your only expense you'll need to save money for, when purchasing a home!

The down payment is money you will pay upfront, once your offer on a home is accepted, while closing costs are paid at the end of the transaction, right before your purchase is final.

Closing costs are typically an additional 2 - 5% of the loan amount (not the purchase price). I always tell my clients to save 5% because you don't want to get to the end of your transaction and discover it is going to cost more than you have available. That is devastating news to learn when you have gone through the entire process only to find out your closing costs are going to be more than you expected. And, unfortunately, there is no way to know exact costs until literally a couple days before closing.

Both down payments and closing costs are typically wire transferred to the escrow agent (the person holding the funds in a safe deposit account at a bank), which is typically a title company, real estate broker, or attorney. These funds are held with very strict safety measures and guidelines, on your behalf, to secure the transaction. The escrow agent may also be the closing agent - the person processing and handling your transaction, and although they sometimes allow for you to bring a cashier's check or money order to the closing, I highly advise against this. Electronic wire transfer provides a much better and safer option, and can be done through your local bank.

Determine How You are Going to Pay for Your Purchase (Financing) - While financing through a mortgage lender (home loan) is typically the way most people purchase their homes, there are a number of options and creative ways to consider buying your first or next home, including:

  • Cash - Very few people have the cash to pay for their home outright, with no mortgage. But, if you have the financial means to do so, cash will get you further than any other option, including putting you in a position of power to negotiate the sales price. Sellers will often reduce their asking price if they know a buyer is paying cash versus financing the purchase. That's why investors typically pay cash for homes. By doing so, you can avoid the lengthy financial contingencies and getting approved for a home loan, which means you can close a lot more quickly and not pay interest. You will still have to pay taxes and closing costs, however, but the money you save on the sales price will typically reduce your closing costs and final expenditures.

  • Cash and Financing - Sellers who are ready to move often have enough equity in their current home that will fund a large portion, if not all, of their purchase of the next home. Once their current home closes, the proceeds from that sale can be used either to pay for the next home or as a very large down payment, with financing the rest. This greatly reduces the monthly mortgage payment, interest, and terms of the loan, and affords buyers the ability to pay off their home much more quickly.

  • Home Loan - Typically the way most people buy their homes, which is through a mortgage lender. There are plenty of lenders to choose from, including nationally known mortgage lenders (Rocket Mortgage (Quicken), Lending Tree), local independent brokers, and banks/credit unions. Each offer a variety of home loan options, but not all offer everything. For instance, Rocket Mortgage does not finance USDA home loans. And each set their own parameters when it comes to minimum DTI, credit scores, loan application and processing fees, etc. As your Realtor for a lender referral. It's the easiest way to get a great lender.

Know Your Credit Score and Don't Make Any Major Purchases - Both items are equally as critical as saving for your down payment and closing costs. Credit scores will affect your ability to qualify for specific loans, determine your interest rate, and ultimately impact your monthly mortgage payment. Although each home loan has a minimum score requirement (see below), obviously, the higher your credit score the better it will serve you. A good credit score is typically a score of 700 or above.

Click here to get a FREE copy of your annual credit report.

Minimum Credit Score Requirements (subject to change):

  • Conventional Loans - 620+, but they offer great rates and low down-payment options when you have a higher credit score.

  • FHA Loans - 580+, are the most popular loans due to low down-payment requirements and lower credit score - backed by the Federal Housing Administration.

  • VA Loans - 580+, but are only available to veteran or active-duty service members. Although the VA doesn't require a minimum credit score, most lenders have their own minimum credit requirements - typically 580+.

  • USDA Loans - 640+, and are only available for home in eligible rural areas, determined by the U.S. Department of Agriculture. There are also other parameters to qualifying for this loan.

Avoid making large purchases or expending large sums of money when preparing to buy a home. All of this will dramatically decrease your chances of getting approved for a home loan.

For instance, DON'T:

  • buy a new car, boat, RV, or any vehicle

  • apply for credit cards or rack up credit card debt on existing cards

  • go on vacations, cruises, or trips that will cost you a lot of money

  • transfer large sums of money in or out of your bank account

  • loan anyone money or borrow money without first talking to your lender

  • incur any major debt during your application/loan process (if you can help it)

All of this will impact your debt-to-income ratio and create a moving target for your lender, which in turn, will be detrimental to your loan qualifications and approvals.

Select a Lender and a Realtor - This is sometimes the hardest challenge because there are countless lenders and real estate agents to choose from, and it can be quite overwhelming. But, I suggest starting with the Realtor, first, because it will be a lot easier to interview and select the right agent than to select the right lender. Plus, agents have experience with various lenders and typically know which lenders offer the best service for home buyers, and can refer you to at least a couple of great lenders they have worked with and know.

Selecting the right agent sometimes comes down to chemistry, personality, and connection. If personalities conflict, it will make for a rough transaction and you, as the buyer, will not feel comfortable or confident in your purchase.

The same holds true for real estate agents. I highly recommend you select a "Realtor," versus a non-Realtor agent. What is the difference? Although all Realtors are either real estate agents or brokers, not all real estate agents or brokers are Realtors. Realtors are exclusive members of the National Association of Realtors (NAR), which was founded in 1908. Not only is it the oldest trade association in the industry, NAR set the standard for conduct, ethics, and integrity in real estate

Only members of this exclusive association may call themselves "Realtor," which means they have subscribed to NAR's strict Code of Ethics, which were created to ensure consumers' best interests were served by members subscribing to these principles. Many of these ethics have been adopted by states and have influenced current housing laws. So, when you see the famous NAR "R," you know that Realtor is a valued member and trusted agent. Again, each Realtor offers different options and levels of service.

At Canzell Realty, we hold our agents to a high level of service and accountability, because YOU matter more to us than the transaction! And we treat our clients the way we would want to be treated, because many of us have been buyers and sellers, and have not always had the best experiences with lenders or agents, ourselves, so we know what it's like to be in your shoes!

To begin your journey on the road to home ownership, give us a call or contact us to schedule a FREE, no obligation consultation. This casual, 30-minute meeting can be conducted in our office, a public place (typically a restaurant or other meeting space), or via Zoom, and will provide you everything you need to know about preparing for and selling or buying your next home.

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