Despite the Covid-19 pandemic, 2020 saw rising prices in the housing market, particularly in the latter half of the year. Although it’s currently a seller’s market, meaning the demand for houses is outstripping the available supply, there’s good news for first-time homebuyers in 2020: Interest rates remain incredibly low. For a 30-year mortgage, borrowers can expect to pay just under 3 percent in interest, which makes mortgage payments more affordable.
Here is our Buying Guide for First-Time Homebuyers in 2020
Know Your Market
A single-family home for under $500,000 is exceedingly rare in San Francisco, but homes for sale in Scottsdale, Arizona will have several homes at or below that price point.
When you’re ready to start buying real estate, you need a solid understanding of your local market so you can identify rare opportunities and develop a realistic sense of what kind of homes are available in your budget. As a first-time homebuyer, you probably don’t have the real estate experience to thoroughly analyze your local market, but a good real estate agent can help.
Choose a Great Realtor
You don’t want to commit to spending hundreds of thousands of dollars without an expert to guide you through the process. A good realtor will patiently guide you through your first home purchase by recommending a mortgage broker who will work with your credit score and budget, helping you determine the right neighborhood for your family and negotiating the perfect deal once you’re ready to make an offer.
An experienced real estate agent has spent years specializing in specific housing types and neighborhoods, so they’ll know when you can make an offer under the listing price and when you need to bid aggressively to secure a property.
First-time homebuyers especially benefit from hiring a realtor. Look for someone who specializes in new buyers and will be available whenever you need them. A missed deadline or slipshod inspection can end up costing you big bucks, so make sure your realtor is organized and willing to walk you through every step of the homebuying process.
Don’t think of a realtor as a sales agent; instead, consider your realtor as your personal concierge. He or she is earning thousands of dollars for facilitating the sale, so expect someone who will answer your questions, no matter how small. Don’t worry, though — the commission for a buyer’s agent is typically paid by the property seller, so you won’t be paying anything out of pocket for your realtor’s advice.
Set a Budget Before You Start Shopping
It’s important to set a hard limit on how much you’re willing to spend on a home before you start browsing real estate listings. Most financial advisers suggest keeping your total debt payment under 45 percent of your gross income, but this figure includes student loan bills and car notes.
Use a mortgage calculator to determine how much you can pay monthly, and stick with that figure. Emphasize to your realtor that you aren’t willing to consider homes over your budget. You don’t want to fall in love with a backyard pool or finished basement and find yourself putting half your paycheck towards your mortgage payment.
How Big of a Down Payment Do You Need?
A big down payment can make up for a poor credit score or low levels of income, but first-time homebuyers usually don’t have piles of money sitting around collecting dust. Instead, new buyers often want to know the lowest possible down payment possible for buying a home.
Conventionally, you’ll need 20 percent of the purchase price to secure a mortgage, but many different federal and state programs exist to help you buy a home with as little as 3 percent down. A real estate agent can guide you through the available options in your area.
How Your Credit Score Affects Homebuying
Your credit score can have a massive impact on both the size and interest rates of the mortgage you obtain. That’s because your score is considered a key indicator of your ability to repay debt. You can obtain a free credit report through most major credit card companies or online at AnnualCreditReport.com. If your score is in the 700s or higher, you’ll qualify for most mortgages on the market.
If you have a credit score of 600 or lower, you might struggle with finding a mortgage. Luckily, you have a few options. First, you can look into government-backed home loans for first-time homebuyers and veterans; these programs have lower-than-average requirements for credit scores.
Second, you can save up a large down payment or look for a family member who’s willing to co-sign your mortgage. As a final resort, you can work on fixing your credit score, but this option may mean delaying your dreams of homeownership for a few months.
Preapproval vs. Prequalification
For first-time homebuyers, prequalification is an important step in understanding how much you can afford to spend on a house. Prequalification is a quick, informal check of your financial position; a bank will analyze your income, credit score, down payment and preferred budget.
If the bank approves, you’ll be prequalified; at this point, most banks will provide a verification letter of your prequalification. If the bank decides you don’t qualify for the loan amount you’re requesting, you may need to lower your mortgage expectations or work on your credit score before starting to search for homes.
Preapproval is a more in-depth process. While prequalification is mostly based on your allegations, you’ll need to submit proof of your income and financial assets before you can be preapproved. Most banks will ask for bank statements, tax returns and W-2 documents from the last two years and paystubs from the past 30 days.
More than Just a Mortgage: True Costs of Homeownership
If you’re paying $1,500 per month in rent and can secure a mortgage for just $1,200 per month, obviously you’ll save money by buying real estate, right? Not necessarily. First, find out if your monthly mortgage quote includes taxes and insurance premiums; those costs could add several hundred dollars per month to your payment.
Second, consider the hidden expenses of owning your own home. Instead of calling your landlord whenever you have an issue, you’ll have to get out your checkbook and call your own plumber, electrician or contractor. You’ll likely have to purchase or replace home maintenance items like lawn care equipment, fire extinguishers and smoke alarms.
Third, most new homeowners can’t wait to remodel or redecorate, so your monthly budget should include funds for new paint and furniture. Owning a home may save you money in the long run, but most owners need at least five years to break even compared to simply renting.
In 2021, real estate experts anticipate rising levels of housing stock, including large numbers of foreclosures as Covid-19 protections ease and lenders resume processing defaulted loans.
More houses on the market may lead to lower housing prices, but interest rates are also expected to rise, so you likely won’t save much money by waiting to buy. Because housing market trends vary greatly by region, it’s vital to work with a local realtor when trying to determine the best time to buy.