Is 2020 the year you become a homeowner?

If you are thinking about buying a house this year, we are here to help. While home prices are still hovering around all-time highs and in most cities, it is still a seller’s market, there are plenty of signs that home prices could be headed down. 

Election uncertainty, a peak real estate market and the fact that the price per square foot is at an all-time high in many places could result in a stalling market that leads to lower prices, making 2020 a great time to enter the real estate market. 

The home buying process can be intimidating, especially for first time buyers but our guide below should help make the process a bit smoother. 

Here is a quick rundown of what you need to do to get on the property ladder in 2020. 

Decide on a budget

One of the first thing you need to decide on is a budget for the home. Look at your household balance sheet which should consider your debt, income and assets. Be sure to include new expenses that will come with homeownership such as estimates for property insurance, taxes, as well homeowners association fees if applicable.

Examine your balance sheet and down payment to determine exactly what you can afford on a monthly basis for a mortgage. In many cases a bank may be willing to lend more than you can comfortably afford so avoid buying a house that is beyond your budget. Decide on a budget and stick with it, being house poor can be frustrating and may result in you losing your home if unexpected bills or illnesses pop up. 

However, if you live in a major metro area, most homes may be out of your budget range. As an example, if you live in San Jose, California where the median home price is $1.2 million dollars you may need to think outside the box to getting on the homeowner ladder. Housing experts advise homeowners to consider looking for a “rent to own” property which means you rent the home at first with an option to buy sometime in the future. In extremely expensive cities you may have to consider a smaller house or condo.

Check your credit

As you start your journey into homeownership be sure to pull your credit report and check your credit score which will impact the interest rate on your mortgage. Mortgage lenders tend to offer their best rates to applicants that have a good credit score. In order to qualify for a conventional loan you will need to have a credit score of 620 or better. While it is still possible to secure a mortgage with a lower score, your interest rate will be higher. 

If your credit score is not where it needs to be you may want to hold off buying a home until you can improve your score so you can secure a lower interest rate. 

There are a number of steps you can take to improve your credit score:

• Verify Your Credit Reports Are Accurate: A mistake on your credit report can cause problems with your score. Review your credit report and fix any mistakes you find. This can have an immediate impact on your score. 

• Decide What needs to be improved: Are late payments causing your low score, an account being sent to collections, too much credit, or too short of a credit history? Try to determine what is causing your low score and make a concerted effort to correct it.

• Pay bills on time: If you have not been getting your bills paid on time, it’s time to get organized. Make sure all of your bills are paid on time and avoid late notices and being sent to collections as these will dramatically impact your score for the worst. 

• Clear Up Any Collections: If you have been sent to collections on an account, it is time to get this resolved and cleaned up. Pay off any remaining debt and ask for the collection notice to be removed from your credit report. 

• Get a Credit Card: If you don’t have much of a credit history and don’t currently have a credit card, it’s time to get one. In order to have a credit history, you have to have credit. Get a credit card, use it sparingly and pay off your balance every month on time.

• Limit Credit Applications: When applying for a mortgage do not apply for other credit cards or loans. This will impact your credit score in a negative way. 

Get Your Down Payment in Order

The down payment is often a stumbling block for new homeowners. It can be daunting to come up with 20 percent of the purchase price, especially if you live in an expensive area such as San Francisco and New York. 

Having 20 percent down is not always necessary but if you have less than 20 percent you will need to carry PMI or private mortgage insurance. PMI cost roughly .03 to 1.5 percent of your mortgage every year until you have 20 percent equity in your home. 

If you have less than 20 percent for a down payment make sure you factor in the cost of PMI when you are working up a budget. 

Now that you have established a budget for your new home (step 1) you should have a clear picture of how much you need for down payment. If it turns out that you are coming up short on the 20 percent, you may want to hold off until you can save up the necessary funds. 

Decide on a Mortgage

There are a variety of different mortgage types and you will need to decide which one is best for your situation as well as what type you will qualify for with your particular finances. Check with local lenders, ask your friends and family for recommendations and check with your real estate agent to find a lender. 

If your credit score is lower than 620 you will not qualify for a conventional loan. This means you may need to look at FHA and USDA loans which come with their own set of requirements and conditions as well as higher interest rates. 

If you can afford the monthly payment, consider a 15-year mortgage over a 30 year one. You will save tens of thousands of dollars over the term in interest, but your mortgage payment can be significantly higher. Never take out a mortgage that will be difficult to pay on a monthly basis or leave you house poor. 

A standard 30-year mortgage will come with a lower payment and is by far the most common choice of homebuyers. According to Freddie Mac in 2017, 90 percent of homebuyers chose the 30-year fixed-rate mortgage. The lower monthly payment can be an advantage at the beginning of your homeownership when money may be a bit tight, but as you grow into your home you may decide to pay down the principal faster which can help save on interest payments. 

Get a Preapproval 

Getting preapproved for a mortgage is an absolute necessity when shopping for a home. It not only gives you a price range to shop in, it also tells sellers you are serious about buying and are qualified to purchase their home. 

Preapproval is pretty simple with most lenders. Simply provide the lender with their required information which usually includes:

• Work history
• Income
• Debt
• Assets
• Credit profile

Once you have been preapproved, the lender will provide you with a preapproval letter that gives you an estimate of how much you can borrow. 

Start Shopping

It’s now time to start shopping for your new home. Be careful and don’t rush into buying a house, always do your research and due diligence. Check out the neighborhoods you are considering carefully, look at the local schools and always have an inspection done on any home you are seriously considering. 

If you are shopping in a hot market (think San Francisco) you may be tempted to put in an offer with no contingencies such as an inspection to improve your odds of getting the home. This can be a huge mistake as an inspection can expose issues with the house that can be very expensive to fix. Issues that will fall to you once you close.