Updated: Dec 26, 2021
How is 2022 already here? Does anyone else feel like we are still in the year that must not be named?
Regardless of how we feel about what year it is, the reality is it is almost 2022, and if buying a home is one of your top goals, there are some things you need to do to make that goal a reality. (want to watch a video with all this info? Head over here: Want to buy a home in 2022? Do this NOW - YouTube)
#1: SAVE.SAVE. SAVE.
Dave Ramsey and I are on the outs after that tweet...You know the one I'm talking about. The "Don't buy a new car until you have at least a $1 million net worth" tweet. I swear I lost my mind when I read that.
I fear Dave may be losing his touch with reality. However, Dave is right about one thing. You need to budget and save if you plan on buying a house this year.
No, you don't need 20% down in order to buy a house. There are plenty of down payment assistant programs, along with FHA loans, and certain conventional loans that allow for incredibly low, down payment options. What disqualifies a lot of buyers, however, is their lack of funds for closing costs. I KNOW. No one ever talks about closing costs (don't worry, I have a video that is forth coming that goes into detail about what exactly closing costs are). Everyone is so focused on the down payment that they forget that they need to save an additional 3-5% in order to actually close on the house. The solution to this? Save. Save. Save.
Let's say you have your eye on a $300,000 home. You qualify for a conventional loan with a 3% Down payment option. That's great! That means you have to put $9,000 down. Now, you'll have to pay 1% of that upfront as earnest money when you go under contract on the home. So, make sure you are liquid enough to write a check for $3,000 within 72 hours of going under contract.
Next up, you have an inspection (which you WILL be getting one, I don't care what the market is doing) and an appraisal. Both of these are buyer expenses. I would suggest saving an additional $1,000 in order to pay for those. Inspections tend to run $250-$500 (depending on the sq footage of the home) and appraisals tend to hover around $500-$600. Saving $1,000 should take care of both of those in most cases. Next up we have closing costs which will be an additional 3-5% of the sales price. Closing costs include things like your home insurance, lender fees, and upfront payment of taxes. For this example, lets estimate high and assume you need 5% of the purchase cost in cash to close. That is $15,000 in cash to close. Add that to the down payment and other fees and you should have $25,000 in cash in order to close.
Now, we can get into a discussion of saving more than that as you are now going to be responsible for anything that happens to the home. I always suggest saving some more just in case the furnace goes out as soon as you move in, or a baseball comes through the window-curtesy of your new neighbor playing an innocent game of baseball. You need to be able to cover those costs and not feel panicked if you can't.
I think that it is amazing you can get into a $300,000 house for only $25,000. These low down payment options really do help people achieve homeownership much faster, but that $25,000 just needs to be saved for. I've made an estimated mortgage and closing cost calculator. If you'd like to try it out so you can play with the numbers of your particular situation, shoot me an email at email@example.com and I can get that to you!
#2 BOOST THAT CREDIT SCORE
* You don't need a perfect credit score to buy a home. Lenders really want to see at least a 620 (they can be talked into it at 580, but you need to decide if you should be buying at that credit score).
*Make sure you are paying on time. If you are late, no other strategy can save you from how badly the late payment will hurt you. Late payments can stay on your credit report for 7.5 years! If all you can pay is the minimum, it's OK! Just don't do it late. Making small, micropayments, can help make sure you reach the minimum and you've paid on time.
* Try to keep your credit usage below 30%. If you can get your credit usage below 7% prior to getting pre-approved for a loan, you will be shocked how much that helps you. Having that low of a usage will show the lender that you are less of a risk to them. Meaning, you can get pre-approved for a higher amount at a lower interest rate.
* If you find errors on your credit report, dispute them! Credit is very important when purchasing a home, so don't let errors on the card statement get in your way
#3 PAY ATTENTION TO YOUR DTI
DTI stands for debt-to-income ratio. DTI is "a personal finance measure that compares an individual’s monthly debt payment to their monthly gross income (https://www.investopedia.com/terms/d/dti.asp).
Lenders often take a look at this right away to see if you can even qualify for a loan. Ultimately, they want to see a DTI of 42% for FHA loans. 36% could get you into a conventional loan. Things like car payments, minimum credit card payments, alimony, and student loans, all count towards your debt. Lenders will add all of these minimum payments up, as well as what your estimated mortgage payment will be and divide that by your monthly gross income (this is your income prior to any taxes being taken out). You can figure out what your DTI is by doing all this math prior to meeting with a lender. That way you at least have an idea of where you stand!
#4 ASSEMBLE YOUR REAL ESTATE TEAM
That includes your real estate agent, and your lender. Does it matter which one you meet first? No, not really. Most agents have lenders they have worked with in the past and trust, that they can recommend. Lenders also have plenty of agents to send your way. Know that no one is getting any sort of reward or "kickback" by these recommendations. It is literally illegal. It cannot happen. People that are found to be receiving kickbacks will lose their licenses immediately.
The important thing here is to find people that you are 1000000% comfortable with. I'm serious about this. Buying a home is a huge deal. Financially, mentally, emotionally. You want to make sure that those people on your team are people you can ask questions of and keep you on the right track in finding your new home and getting to the closing table. I suggest interviewing multiple agents and multiple lenders. (If you need a list of questions to ask potential lenders and agent's please let me know!)
Will you need to be pre-approved prior to searching for homes? YES. You do. There is no way around this. Remember that the homes you are seeing are lived in. They are someone's current home. Seller's need to know that you have been vetted and are able to buy their home prior to letting a stranger come inside and take a look around. I know it's hard if you're just wanting to take a peek, but you need to remember that you are a stranger asking to be let into someone's home.
If you follow these steps, you are well on your way to purchasing a home in 2022! If you have additional questions about how to get started on the home buying journey shoot me a text at 970.692.3573 or feel free to give me a call. If you're in Colorado I would be happy to interview to be your agent. If you're not, I have a ton of trusted agents I can send your way!
Have a fantastic day!