How to buy a house in 2024
Buying a house in 2023: What you need to know
Of course, as you can see by the occasional dips (or cliffs) in home values, including the five-year drop beginning in 2007 and the most recent fall in prices, houses don't always appreciate over the short term. Much like the stock market, a home is a buy-and-hold asset.
So, presently, interest rates are no longer historically low, and home prices have been on an increasing trajectory for decades. Choosing to buy a home based on the perfect timing of low mortgage rates and affordable home prices is rarely, if ever, possible. Over the long term, home prices are likely to continue appreciating, and since rates move up and down over time, refinancing opportunities may crop up as the years go on.
First-time home buyers: What's changed in 2023
Besides mortgage rates? The most significant change is the share of home buyers who are first-timers is at its highest level in over a decade. Half of all home buyers were first-timers in 2022, according to Zillow research.
The buying frenzy of bidding wars and red-hot housing markets seen during the years of record-low interest rates is over. Part of the reason is because potential repeat buyers are staying put with their existing low-rate mortgages. With less buying competition, first-time home buyers may have more of an opening to make a deal.
Repeat home buyers: The 2023 mortgage rate challenge
According to another Zillow report, current homeowners may stay put for quite some time. The report says that would-be repeat buyers are looking for mortgage rates to dip back down to 4% and 5% before giving up their lower-rate home loan.
As a result, buyers are once again seeking out temporary mortgage rate buy-downs and adjustable-rate mortgages.
Buy-downs allow for two to three years of lower-interest payments in exchange for an upfront fee. And ARMs enable buyers to lock in a slightly lower interest rate for a few years before annual or semiannual rate adjustments later. It's essentially a bet that interest rates will head lower in a couple of years, allowing for a fixed-rate refinance.
ARMs can also be suitable for buyers expecting to move again before the introductory fixed-rate shifts to variable interest.
How much house can I afford?
A quick and easy formula for home affordability can be calculating 28% of your monthly before-tax-and-deductions (gross) income. That amount should cover your mortgage payment, insurance, taxes, and other housing costs.
Lenders will look for a total debt load of 36% or less of your gross pay. That would include housing costs, plus monthly minimum credit card payments, vehicle loans, personal loans, and any other debt.
How much money do I need to buy a house?
Now, we're getting to the essential details. Just how much money do you need on hand to buy a house? The down payment will be the biggest chunk of cash that you'll need. That can range from 3% of the purchase price (some lenders even offer 1%-down loans) to the optimum 20%. "Optimum" because with 20% or more down, you won’t be charged private mortgage insurance. PMI is a fee that protects the lender in the event that you default on the loan.
Other low- and no-down-payment options are available, which we'll cover next.
When you make an offer on a house, you'll likely have to put up some earnest money with your written offer. That can be from several hundred to a couple thousand dollars. But don't worry, this isn't a new chunk of cash. It's a small slice from your down payment and will be applied to the total money down later.
Then there are closing costs. Figure those will amount to another 3%-4% of the home's selling price.
Lenders will also want to see a cash cushion available for maintenance, repairs, furniture, and other related expenses, such as moving costs.
Let's do a back-of-an-envelope rough estimate based on a $300,000 home:
At the minimum, you might qualify for a conventional loan with a 3% down payment. So that's $9,000. A National Association of Realtors report said that first-time home buyers typically made a 6% down payment in 2022, while repeat buyers put down 17%. You can adjust your estimate according to your down payment plans.
Closing costs could range from $9,000 to $13,000, or 3%-4% of the loan amount. These fees typically include an appraisal, inspection, title insurance and other prepaid and escrow funds required. Your lender will provide details in a Loan Estimate — and the final figures in a Closing Disclosure three business days before closing.
Home maintenance and repairs: It's good practice to have some cash on hand, just in case there are some early expenses to cover. Let's say $1,000 to $2,000.
Moving expenses could vary a lot, depending on distance and how much stuff you have. Got friends or relatives with a truck and some strong backs? Maybe $100 for pizza and beer. If not, figure $2,000 to $5,000.
That's a ballpark minimum of around $20,000.
How to buy a house with no money in 2023
Mortgages requiring no down payment are widely available through two primary programs: the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture.
VA loans are, by far, the most-used method to no-money-down homeownership. As of June 2023, the VA said 3.7 million veterans had active home loans guaranteed by the agency. Loans backed by the VA are issued by mortgage lenders, such as banks, credit unions, and other loan providers. To be eligible, you must be a U.S. veteran, current service member or a qualified surviving spouse.
USDA loans are for the funding of a primary residence of low- and moderate-income borrowers — but aren't just for residences built on property with agricultural purposes. They can be single-family homes in rural and suburban areas, too.
If you don't qualify for either of these two government loan programs, there are local and state housing finance agencies that offer aid, grants, and down payment assistance to low- and moderate-income households. There are also programs to assist teachers and first-responders to buy a home.
The U.S. Department of Housing and Urban Development has resources to help you learn more about home-buying-assistance programs.
The 2023 first-time home buyer federal tax credit
A federal tax credit for first-time home buyers, which ended in 2010, has been up for renewal time and time again in Congress, including earlier in 2023. The latest proposed version would allow a $15,000 credit against your federal income tax bill. So far, the measure hasn't been approved.
Credit score needed to buy a house
The lowest interest rates are earned by borrowers with a FICO score of 760 or better, according to credit services provider Experian. More expensive homes are financed with jumbo loans and generally require a credit score of 700 or better.
Service members and veterans can tap the benefit of a VA-backed loan, with lenders generally looking for applicants with a 620 FICO score or better. Lenders making conventional loans, which aren't backed by a government agency, also look for credit scores of 620 or higher.
Rural and suburban homes might qualify for a USDA loan with a 580 credit score. And you might even be eligible for a mortgage with a credit score as low as 500 with an FHA loan — but a lender could require 10% cash down.
Yahoo Finance tip: Know your credit score and use this calculator to get an idea of the rate you may qualify for.
How to buy a house with bad credit
As just noted, FHA offers the lowest credit score hurdle to buying a house, at 500. Having a decent down payment helps make your case with a lender. Of course, working to build your credit score before buying a home is probably the best option. Actions to consider include:
Make sure your credit report is accurate. Many people who haven't checked their credit record in a while find long-lingering errors that can be corrected, according to Consumer Reports.
Investigate government home-buying-assistance programs as mentioned above.
Pay down debt. Every dollar decrease in debt works toward boosting your credit score.
Pay every bill on time. And paying early can help polish your credit profile by lowering your credit utilization, a measure of debt used by credit score providers.
Finding a co-signer — perhaps a family member — with good credit to help guarantee the home loan may also be a path to homeownership until your credit history recovers.
Yahoo Finance tip: Getting a mortgage with bad credit means your interest rate will be higher. That can be a long-term penalty for what may be short-term credit issues. Repairing your credit before buying a house might be the best financial decision.
How long does it take to buy a house?
This question is difficult to answer because it depends on your circumstances. But here are some general parameters.
Getting financially prepared can take weeks or months — or much longer. You’ll also want to get your records in order for the loan underwriting process. That can include tax returns, bank statements, proof of income, and other paperwork.
Then there's shopping for a lender and getting a pre-approval in hand. That's a week or two, at least.
Finding the right house might take a couple of months or more. In 2022, the NAR said it took home shoppers a median of 10 weeks before finding their next address.
Making an offer on a house can take a week or two of possible give-and-take bargaining.
Then, the mortgage process begins. HUD estimates that lenders will take 3-6 weeks to complete the loan approval process.
The three-day countdown to loan signing begins when you receive the Closing Disclosure.
Then, an hour or so around the closing table, and you're done.
13 steps to buying a home in 2023
Breaking down the home-buying process can make it less overwhelming. Here are the landmarks you will want to achieve along the way:
1. Know how much house you can afford
To start, you'll want to determine what you can comfortably spend. If you properly gauge your financial capacity, your monthly mortgage payment will feel right from the beginning and get even easier to make over time.
Divide your pre-tax monthly salary by four. That's a good start for a target monthly payment. But that's not just principal and interest payments. You will also want to include property taxes and homeowners' insurance in the total. Mortgage lenders often recommend your housing costs total around 28% of your gross pay. That calculation is known as your debt-to-income ratio.
2. Be financially prepared
You need to lay a solid financial foundation for homeownership to be comfortable with the ongoing costs of owning a home.
Reduce debt
Prioritize paying off debt before buying a home. You'll have plenty of new expenses after you move in and will want to have extra spending power available.
Check your credit score
Knowing your credit score is a must. Many financial services providers offer FICO scores for free, and the numbers will vary a bit from each. Knowing generally where you fall on the bad-to-excellent scale will suffice. The higher your score, the better your bargaining power for a lower interest rate and fewer fees.
Have a cash cushion
Lenders want to see that you've got some money left over after making the down payment and covering the closing costs. It doesn't have to be a huge amount, but showing that you have a bit of a cash cushion during the purchase and once in the home is a good thing.
3. Bank the down payment
That lump sum down payment has to be in a savings account or somewhere readily accessible. From the minimum 1% of the purchase price to the preferred 20% down, or anywhere in between, it's got to be money ready to be in motion.
4. Shop lenders for the best mortgage
It seems people may have finally learned this lesson. Over the last nearly 10 years, over 60% of home buyers said they shopped more than one lender, according to Fannie Mae research. Gone are the days when buyers just went with a real estate agent's "preferred lender," no questions asked. Comparison shopping mortgage lenders for the best rate and most favorable fees is a thing. Don't skip it.
5. Get pre-approved
Getting a written mortgage preapproval in hand is another step rarely taken for granted these days. That's because real estate agents and home sellers want to be sure you're a serious shopper.
6. Find a buyer's real estate agent
Now you're set to shop for that perfect house. Almost. You need the right real estate agent on your side — and that's not the seller’s agent shown on the "for sale" sign or the "listing agent" named in the home’s online profile. Talk to two or three buyer’s agents and find a strong negotiator and advocate.
7. Find a house (or two)
The fun part: looking at houses. Sure, you skipped down to this house-hunting step a bit early, right? Not to worry, because now that you've completed steps 1 through 6, it's time for a serious search for the perfect home. Attend some open houses and scour the local market for neighborhoods and amenities that best suit you. Find a couple of contenders: one to make an offer on and some backup options if your favorite falls through.
8. Make an offer
Your buyer's agent will handle the details of making an official offer and negotiating counteroffers.
9. Get a home inspection and appraisal
Then comes a home inspection and home appraisal. Both protect you from unknown problems and a valuation issue. Inspection issues could include things such as a leaky roof, mold or plumbing and electrical problems. The appraisal assures the lender that the property is worth enough to warrant a loan approval — and alerts you to the possibility of overpaying for a property that may be worth a lot less than you thought.
10. Shop for homeowner's insurance
It's time to shop again, this round for insurance. Your lender will require it, and of course, you need it. It's another round of comparison shopping between multiple providers. Bundle and save? You've got to put every sales pitch to a numbers test.
11. Choose your lender and apply for a mortgage
With an offer in hand, you can get real-deal loan offers. Each lender vying for your business will give you a written offer. If you have each lender provide a zero-discount-points offer, you can compare apples to apples and then decide if you want to buy points to lower your interest rate.
12. Do a final walk-through
Before closing, you'll do one more walk-through with your agent to ensure everything is as promised. Repairs, if any, are completed; things like that.
13. Close the loan
You'll face a pile of paperwork, so be patient. Ask questions and understand what you're signing. If there are any last-minute surprises, you can still walk away. But don't worry, that's not likely to happen. You'll probably have a, "Am I really doing this?" feeling, but it will soon transform into delight and excitement when you get the keys.
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