The Housing Market is Cooling | How You Can Prepare to Buy a Home

The Housing Market is Cooling | How You Can Prepare to Buy a Home

Are you thinking of buying a home in 2022? It’s no secret that the housing market is starting to cool off.

An increase in mortgage interest rates and rising inventory are helping to reduce the chances of bidding wars. Moreover, they’re also helping home prices not increase as fast.

However, buyers should have a plan before they start looking. That means saving up for a down payment and checking credit scores.

Figure out your budget

Average mortgage interest rates are slightly above 5%. While that’s not the highest rate, it’s two percentage points higher than last year. Higher interest rates eat into your buying power.

And it’s because higher rates translate into larger monthly mortgage payments. So, you might have been able to afford a $450,000 home with a rate of 3.11%. But at 5.11%, your affordability range maxes out at $375,000.

Depending on your research, the average U.S. home price is between $344,141 and $428,700. Average prices in your area could be higher or slightly lower. Price points will also fluctuate depending on what type of home you’re looking for.

Single-family homes sell for less than condos and townhomes. Also, prices tend to fluctuate depending on the number of bedrooms and bathrooms, features, and neighborhoods. Another thing you must budget for is your down payment.

Save for your down payment

You’ll need at least 20% down to avoid private mortgage insurance. Given average home prices, that’s between $68,828 and $85,740. The more you can put down; the less your monthly mortgage payments will be.

That’s because you’ll have more equity in your home and will take out fewer principal loans to pay interest on. Say you go under contract on a home for $350,000. You put down $150,000, more than the required 20%.

Your mortgage’s principal balance is $200,000. With homeowners’ insurance, property taxes, and interest, you could still pay over $1,400 per month. Any HOA fees would be paid on top of that.

Once you’ve figured out a budget for a range of home prices, figure out how to save as much as possible. That might mean renting a smaller place, getting roommates, living with family, or taking a second job. The more you put down upfront, the more you save per month.

Look at Down Payment Assistance Programs

There is another crucial step in preparing for finances. Of course, saving up for high down payments might be out of reach for many middle-class earners as home prices rise. However, there are down payment assistance programs for first-time homebuyers and certain types of loans. Research and apply for these if you can.

For example, some states offer down payment grants for teachers and police officers. Seasoned home buyers might also be able to borrow from an IRA or 401(k) to cover a down payment.

Some loans backed by the FHA, VA, or USDA may require zero or low down payments. Those percentages are well below the typical 20%. This can help you get into a home despite rising prices.  

Check your credit

Checking your credit report and score is as important as budgeting and saving for your down payment. Why?  Because lower scores mean higher interest rates when you apply for a mortgage.

And securing the lowest available interest rate can mean the difference between buying the home you love and getting priced out. You’ll need a credit score of 740 or higher for the best rates. The highest score you can have is 850.

You can still get a mortgage if your score is below 740 but at least 620. However, you’ll be paying higher interest rates. Anything below 620 and your application will likely be denied.

Improving your score usually takes time. However, if you notice mistakes or discrepancies in your credit report, you should get them fixed. You can contact the credit bureaus to start the process.

Make a Priority List

Besides price, you need to know what you’re looking for in a home. You also must list out needs versus wants. Needs are deal-breakers while wants are things you’re willing to compromise on.

Say you need a home with two bedrooms and two bathrooms. That is your primary requirement.  However, you’re willing to look at either condos or single-family homes. A fireplace would be lovely, but a home you go under contract on doesn’t have to have one.

You should have your list before contacting a real estate agent. An agent will ask you what you’re looking for so they can match listings with your preferences. It helps them do their job and not waste your time with showings that don’t meet your criteria.

Get Pre-Approved

When you’re ready to start working with a real estate agent, you should get pre-approved for a mortgage. In competitive markets, a pre-approval letter gets you in the door. Many listing agents won’t agree to show a property without one.

They and their sellers want to know if potential buyers are serious and qualified. A pre-approval letter says how much you can afford to pay. The process also isn’t as long as a loan application.

You give the lender your income and permission to pull your credit report. They may also ask for any monthly debt obligations or expenses. However, some of this information comes from your report. A pre-approval letter also gives you a better idea of how much home you can afford.

Final Thoughts

Buying a home in 2022’s real estate market will be less competitive than in 2021. However, buyers shouldn’t expect it to be easy. 2022 will remain a seller’s market, and some bidding wars may still occur.

Buyers should budget, make a priority list, check their credit, and get pre-approved for a mortgage before they look.     

Image by: [Paulbr75]