Are You Planning to Buy this Year?
Are you planning to buy this year? There are some steps you can take now to be ready to buy in the spring.
Speak to A Mortgage Lender
Speak to a mortgage lender now to see if there are any issues with your credit, debt levels or income. A good loan officer will outline any “tweaks” needed and give you a loan amount you should qualify for if everything is in order. Qualifying for a mortgage involves more than a good credit score and decent income. An early start in making sure your finances are in order will make for a less stressful home search later.
In your conversation with your loan officer, you should also have a discussion about the different loan products available. Many people will automatically go for an FHA loan. FHA loans are great for a lower down payment and its more relaxed requirements. However, you should also consider whether the other loan alternatives may be a better option. Also, are you getting the best interest rate? Note that there are other loans other than FHA which have lower down payments. Conventional loans are now available as low as 3% down. Conventional loans also don’t have many of the property condition requirements that FHA loans have. Finally, conventional loans definitely make buying a condo or townhome easier since many condos are not approved for FHA financing.
Loan Down Payment
Regarding the down payment, most loans will require a down payment. A minimum down payments for FHA is 3.5%. This would be $7,000 for a $200,000 home. If you don’t already have the money saved, you will need a plan for getting it or closing the gap of what’s needed. Some buyers use funds from their 401K or borrow from family members if they don’t have enough saved. The lender will need to have some confidence or evidence that getting the down payment won’t be a problem.
Your loan officer should also let you know about closing costs for your home purchase. Typical closing costs are mortgage origination fees, attorney costs, escrow of property taxes, etc. Expect about 2-3% of the purchase price. Often, these can be negotiated as a seller concession during the offer process but the seller does not have to agree to this. Again, you should have a plan for taking care of this cost. You may also want to talk to your lender about available public funds (such as the IHDA down payment assistance program).
Interest rates did increase as expected in 2018. By November 2018, mortgage rates were near 5%. In the first quarter of 2019, rates have declined but they are expected to reach the mid 5s by the end of 2019. The increase in interest rates will have an impact on the amount of money that you can borrow. The Fed has indicated that it plans to be cautious about increasing rates but changes in the economy (and possibly politics) will determine what happens.
Bottom line, it is difficult to know what will happen to rates. The importance for buyers is that an increase in mortgage increase rates may affect the selection of homes that are available to you.
Property taxes may make a significant difference in how much home you can afford so you want to pay attention to this figure when you are looking at homes. In Chicago, property taxes are fairly affordable (especially for homes valued under $250,000). However, in some of the suburban communities, property taxes can be pretty significant for even modestly priced homes. Higher property taxes can have a major impact on the monthly housing payment.
Under the new federal tax plan, deductions for state and local income and property taxes are limited to $10,000 for those who itemize. The impact to you will be based on your individual financial situation.
Selling Before Buying
If you will need to sell your home before buying, there are some things that make sense to do now. The months before putting your home on the market may be a good time to do those small repairs around the house that might be issues for potential buyers. Are there rooms that would show better with a little de-cluttering and fresh paint? Is your furnace more than 20 years old? Is the carpeting soiled or worn? You may not be in a position to make major investments in the home you are selling but are there affordable investments that will counter the impression of your home being dated or lacking proper maintenance? The investments made toward improvement or repairs should increase either the marketability or market value of your home. Talk with a realtor so that you get a feel for the impact of these changes on the marketing of your home.
List of Wants and Needs
Now for the fun part …. Determine your wants and needs for your new home. It will help maximize your home search time if you already have a good idea of what’s important to you. Think about location, schools, your lifestyle and which architectural styles appeal to you most. Do you want a family room, attached garage, big backyard, updated kitchen, etc? What are your deal breakers? The clearer you are in what you want, the easier it is for you to find your dream home.
Exit Plan from Current Home
Finally, what’s your exit plan for your current residence? How will you handle it if you close earlier or later than your lease expiration date? Do you need to discuss this with your landlord? If you own your current home, do you need to sell it first? Call a trusted realtor to determine the value of your current home and get an idea of what you can expect to net from sales proceeds.
Buying a home requires some planning. If you’d like a consultation to discuss buying your new home, please contact me.