What You Need to Buy a House in 2020
You are about to embark on one of the most amazing and rewarding experiences that can ever come from spending money: buying a home. If you are trying to figure out where to start as a first-time homebuyer buying a home in 2020, you should know that the entire process is not quick, but when all is said and done, there are few things more exhilarating than buying a house.
What to Expect for the Housing Market in 2020
Every year the U.S. housing market is different. While the economy expands and contracts, the housing market reacts, producing buyers and sellers markets. If you’re planning on buying a house in 2020, it’s important to understand what the market is doing now and how it’s expected to perform over the course of the year. Luckily, Redfin chief economist Daryl Fairweather gives us her keen insights into what the housing industry is doing in 2020.
“With every new release of data this year, I’m becoming more and more confident that demand will be strong in 2020—just as strong as, if not stronger than, in 2018 and 2017. The big question for the housing market this year is supply. Will homeowners sit on the sidelines, content with their refinanced loans, or will they want to get in on the action too and move up, move down, or cash out entirely? New construction is beginning to pick up though, so even without new listings of existing homes there will be some relief for homebuyers hoping for more selection. However, due to the high cost of acquiring and developing land in expensive coastal cities, much of that new construction will be built far away from urban centers or in already affordable metros.”
If you’re looking to buy this year, follow these guidelines to help equip you with what you need to buy a house in 2020.
1. Check Your Credit Score
Before applying for a loan and certainly before ever making an offer on a house, you should know your credit score. Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will loan you. There are several websites you can use to check your credit score, here are a few to consider: TransUnion, Equifax, Experian.
You can check your score as much as once a day without affecting your credit, also known as a soft inquiry. Hard inquiries are when financial institutions check your credit, typically when you’re applying for a loan or credit card. Hard inquiries lower your score a few points, so try to keep hard inquiries to a minimum.
2. Improve Your Credit Score
Maybe you just checked your credit score and realized it’s not as high as you had expected. Don’t worry, there are a few things you can do now that will help raise your credit score so you can capitalize on a great interest rate.
Pay your bills on time
If you tend to be late on a bill here or there, what you might not know is that you’re negatively impacting your credit. Start paying your bills on time, now. Set up automatic payments for your bills or set reminders, just make sure you can meet the due dates for all your bills going forward. Establishing a history of paying your bills on time is paramount in raising your credit score.
Pay down the debt on your credit cards
One of the biggest contributing factors to your credit score is something called credit utilization ratio. This ratio is determined by taking your average expenditures on all your credit cards each month and dividing it by your total credit limit. Lenders want to make sure you’re not close to maxing out your credit cards and prefer to see a credit utilization ratio of 30% or less.
Don’t apply for new lines of credit or close old ones
Opening new lines of credit is not going to help you increase your score and in many ways can do the opposite. Applying for new credit cards produce unneeded hard inquiries into your credit history, which also negatively affects your credit. Closing unused credit cards can also have negative consequences as this also shows that you’re limiting the credit available to you, which increases your credit utilization ratio.
Have a credit report company dispute inaccuracies for you
After you get your credit report, you may notice several inaccuracies that can be dragging your credit score down. The good news is that you can dispute these errors and a professional can easily get them wiped from your credit report so your credit score can bounce back.
3. Know What You Can Afford
The best way to determine for the first time how much house you can afford is to simply use an affordability calculator. Though calculators such as these do not necessarily account for all of your monthly expenditures, they certainly are a great tool for understanding your larger financial situation. As a first-time homebuyer, if you want to get a better estimate you could get pre-qualified where the bank will give you a guess at how much you could borrow.
After you figure out what you can comfortably afford, you can then start online window shopping for houses and begin to narrow down what you want in a house versus what you can afford. Are you looking at specific neighborhoods? How many bedrooms do you want? Do you need a large yard, big deck, swimming pool, man cave, she shed, etc?
Understanding what you can afford in the area you want to buy will help keep you grounded and focused on what you want in a house versus what might be nice to have.
4. Save Up For a Down Payment
Unless you want to pay Private Mortgage Insurance (PMI), you want to save up for a sizable down payment. PMI is an added insurance charged by mortgage lenders to protect themselves in case you default on your loan payments. The biggest problem with PMIs for homeowners is that they usually cost you hundreds of dollars each month. Money that is not going against the principal of your mortgage.
How much should you save for a single-family home? Twenty percent down is typical for most mortgages to avoid paying for PMI. However, there are other types of home loans, such as FHA-backed loan, Conventional & a VA loan if you have served in the military and qualify, that may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower rate that will save you tens of thousands of dollars in interest over time. So start saving now!
5. Build Up Your Savings
Banks like to see a healthy savings account and other investments or assets (i.e. 401k, CDs, after-tax investments) that you can tap into during hard times. What they want to see is that you are not living paycheck to paycheck. A healthy savings account and other investments are a good idea in general as it will help you establish your future financial independence, but it is also a necessary item on your checklist of what you need to buy a house in 2020.
6. Have a Healthy Debt-to-Income Ratio (DTI)
Another key component banks consider when issuing loans, is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn.
So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but definitely, no more than 43% or you may not even qualify for a loan at all. There are two DTIs to consider as well.
The Front-End DTI: This DTI typically includes housing-related expenses such as mortgage
payments and insurance. You want to shoot for a front-end DTI of 28%.
The Back-End DTI: This DTI includes all other debts you may have, such as credit cards or car loans. You want a back-end DTI of 36% or less. A simple way to improve this DTI is to pay down your debts to creditors.
How do you calculate your DTI ratio? You can use this equation for both f