The year 2022 has been quite a challenging and unpredictable market for homebuyers, especially due to the rising mortgage interest rates coupled with a depleted housing inventory post-pandemic. Although it is possible to successfully go through a seller’s market as a first-time home buyer, you need to be strategic in the process.
With the right planning and research, a first-time home purchase is an attainable goal. However, since buying a house is a major commitment and perhaps the biggest purchase you will ever make, the best way you can make sure you get the house you have been dreaming of while avoiding costly mistakes is to properly understand the processes involved in home buying.
In this article are tips that can help you overcome the hurdles of the current market of home buying.
5 Tips For First-Time Home Buyers In 2022
Go For What You Can Afford
The issue with seeing beautiful homes that are for sale is that it shapes exactly what you want in a home. Then you start to have some big imagination, like imagining yourself sitting on a beautiful white couch opposite a roaring fireplace with a marble-topped kitchen island.
There is absolutely nothing wrong with such a vision, but will you be able to afford it? Moreover, with the rising interest rates in 2022, it is more important than ever to know the amount you can afford to spend on your dream home.
There are four components of affordability which are:
- How much you have saved for a down payment?
- Your income.
- What debt(s) do you carry?
- Your credit score.
Your credit score will directly affect the interest rate on your loan, which also has a multiplier effect on the amount you can borrow. Furthermore, your debt service (the amount you are required to pay per month) will be deducted from the total of how much you can spend on your taxes, mortgage, and homeowners insurance.
Once you have control over those four components, you can get pre-approval for your loan.
Get Pre-Approval For Your Mortgage
Getting pre-approval makes you know how much mortgage you can carry as the lender will put into account your income, credit score, and debt payments. Finding out exactly how much you can borrow will allow you to know how much home you can afford.
Knowing your purchasing power, therefore, will guide your home search and prevent you from experiencing unnecessary disappointments that accompany shopping beyond your limits.
Pre-approval also positions you to be a serious buyer, considering the fact that a lot of real estate professionals will not take on buyer clients if they are not pre-approved.
However, it is important to note that a pre-approval letter from a lender is different from getting pre-qualified for a loan. A pre-approval letter means your credit and your file has been reviewed by a lender, deciding that it will fund your loan.
On the other hand, a pre-qualification letter is when a lender lets you know that regarding the unverified information the lender has from you, the lender already believes that you are qualified for a particular amount of loan.
Evaluate Your Down Payment
The amount you will put down on your home depends on the type of mortgage you will receive. Nevertheless, the range of the typical mortgage down payment is usually from 3.5% to 20%.
In essence, the higher your down payment, the lower the risk you are to a lender. This is because lenders often assume buyers that invest more cash up front are less likely to walk away from their money in their home.
However, when you drop less than 20%, lenders usually reduce that risk by charging private mortgage insurance (PMI). PMI is an insurance policy that safeguards the lender in a case where you default on your loan.
As you deliberate on how much you will be putting down, it may be helpful to meet with a mortgage officer in order to explore possible loan options. An experienced professional will help you determine which loans need private mortgage insurance and how much downpayment you may need to avoid paying that insurance.
In addition, when you save a little more for a downpayment, you may qualify for a mortgage that does not have PMI requirements. Avoiding PMI can save you hundreds of dollars in a month.
Know the Type of Home You Want
After you know your buying power, you can then review the various home options available in your area by first having an understanding of the types of homes there are.
Single-Family Homes
These are what some people mean when they refer to a house. These are not attached to other homes.
Duplexes
These houses are usually two homes with different entrances in one building. They share a common wall, if side-by-side. But in a two-story building, they share a common floor/ceiling.
Condominiums
They are privately-owned units in a larger building where owners own the interior of the unit and not the exterior building. Owners share common areas and amenities such as gardens, pools, hallways, etc. Additionally, there are usually homeowner’s association monthly fees paid to cover the maintenance of those shared areas and amenities.
Townhomes
They are multi-story dwellings constructed side-by-side where the owners own both the exterior and interior of the units. However, there are usually one or two shared walls with other units and association fees to cover shared amenities.
As you review the different homes in your area, you should consider the space you need, the cost of each home, and any additional fees that may be required.
Furthermore, consider your favorite neighborhood features, which may include schools, walkability, parking space, as well as property taxes.
Compare Mortgage Rates
As you start your home search, you should shop for mortgage loan rates. Studies show that comparing mortgage rates with about three to five different lenders may help you snag not only the lowest rate and monthly payment, but also thousands of dollars in interest charges over your loan.
However, as you compare lenders, look beyond the interest rate. Compare the annual percentage rate, closing costs, and lender fees on loan estimates you receive.
It’s Time to Search!
Once you tick all the points mentioned above, you will then be in a prime position to shop for your new home confidently. Not only are your finances already in order, but you also have a solid understanding of your local market, as well as the tools (such as pre-approval) you need to make a competitive offer. And then, you are just a step away from getting the best home for you!
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