It’s a cycle most realtors know well. As winter loosens its frigid grip, the real estate market sees something of an awakening, with more and more buyers on the hunt for homes as the weather warms. And these buyers should be prepared to face tough competition. Let’s look at how we can get them ready for the springtime frenzy.
Pre-Approval Offers a Competitive Edge
What level of competition will we see among home buyers this spring? Substantial. Nationally, the housing inventory has fallen to levels we haven’t seen in over twenty years, with the supply of homes that are on the market on a steady decline. We can look at historically low interest rates as a big reason; buyers have been hot to get in on great mortgage deals and homes have been selling in record times, often mere days after getting listed. But the home-supply forecast isn’t as dire as some may fear; conventional wisdom among economists is that 2022 will come to an end with more inventory than we had when the year began.
Some of this inventory dearth is attributed to the natural patterns of the real estate market. As most realtors know, things are often slow during wintertime, with fewer sellers listing fewer homes, and things usually begin to pick up at the end of February. While the demand for homes will still exceed supply in the foreseeable future, we should see a bump in listings this spring, albeit in a seller’s market in which homes get snapped up fast. However it works out, the buyer with a mortgage pre-approval letter in hand has a clear advantage.
Why begin with pre-approval?
Lots of folks, especially first-timers, take a “testing the waters” approach to buying a house; they simply look around to see what homes are available, figuring they’ll take care of the financial details when they know what home they want. It’s an approach that almost guarantees that some other buyer will snap up that home. Especially in today’s fast-moving market. These buyers likely need guidance on the main benefits of a pre-approved mortgage.
- Pre-approval sets a budget. While a pre-approval letter doesn’t guarantee the eventual loan amount, it is a close approximation of how much someone can borrow if one’s financial situation and interest rates don’t change in the near future. That loan amount, plus what a buyer may have for a down payment, sets the highest price that a buyer can pay for a home.
- Pre-approval flags potential issues. In the mortgage pre-approval process, lenders look at basic financial information and almost always pull credit reports. If there are credit problems, they’ll show up here. Giving the potential borrower time to resolve these issues before they set their eyes on their dream home.
- Pre-approval helps with mortgage choices. Should one get a conventional mortgage loan? Would a VA Loan, or an FHA Loan be better? While borrowers don’t need to choose their mortgage type during the pre-approval process, pre-approval does offer insight into which mortgage is best for which homebuyer.
Won’t interest rates rise this spring?
Almost certainly. Anyone who has been paying attention to the public signaling from the Federal Reserve knows that interest rates are expected to rise this year, and springtime is when we’ll likely see the change. It was bound to happen sometime; the unprecedented low interest rates of the recent past were never seen as permanent.
This impending rise has prompted speculation that homebuyers are less likely to seek out mortgages at these higher rates. So how high will rates go and will this increase serve as a hindrance for homebuyers? The consensus among experts is that we’ll see rates go up between half and one percentage point throughout 2022. Which still makes mortgages attractive for the majority of homebuyers.
Don’t Make the Mistakes of 2021
Almost anyone who was looking to buy a home last spring had to deal with serious competition. Record-low interest rates and low inventory were the kindling that ignited bidding wars. And about two-thirds of Americans who intended to purchase homes in 2021 were ultimately unsuccessful buyers. We can chalk some of that up to a pandemic, but others failed through some common missteps.
Competitive offers are key. While the highest bid does stand the best chance of landing the sale, the right competitive offer often needs more. Mortgage pre-approval shows a seller that the buyer can pay the asking price. Armed with a pre-approval letter, a buyer can more easily suggest an expeditious closing, letting the seller set the accelerated timeline. Offering to purchase a house as-is (after an inspection) also ups the competitiveness of an offer.
A significant number of unsuccessful homebuyers in 2021 lay the blame on their inability to not qualify for mortgages. But was this true in every case? Chances are many of these would-be homeowners wrongly assumed that lenders would deny them loans based on financial situations. While credit histories can’t be improved overnight, focusing on some fundamentals will improve the chances of getting approved for a mortgage. Paying bills on time, working to lower debt, and saving for a down payment makes loan approvals more feasible for many.
Just as snow melts, greenery blooms, and wildlife awaken from long slumbers, spring welcomes a seasonal rise in home sales. And City Lending will be right there to help ensure these springtime purchases go smoothly.
Just as it is with two hearts, the coming together of a home and a home buyer can feel like a mystifying thing, a deep connection that can’t be reduced to sheer numbers and data. Having a plan before the home search begins can help you to know when you’ve met the right one. So here are some things for you to keep in mind.
Think Beyond Location and Price
The old saying that “location, location, location” is the number-one factor may be true. And price sure determines a lot. But a home’s features can be just as important as the neighborhood and the home’s price tag. So do a bit of soul searching and ask yourself how you want to live, what features and amenities are important to the way that you live your life. And write it all down. Armed with a list of exactly what you want your home to have will make the search for your perfect match go much easier.
Interior Features to Consider
The kitchen. For many, it is a home’s very heart, where folks tend to gather the most, the space where you welcome guests, and, of course, cook and share meals. Islands are popular features and ones that home shoppers often seek, as kitchen islands provide ample extra counter space above and storage space below. Dining bars also climb to the top of many lists; casual meals in the kitchen can be more common than sit-down dining at a table for those fortunate enough to have dining bars. Double sinks are quite popular. The features you want your kitchen to have depend on your lifestyle. Will you be doing a lot of cooking for a full family or do you have more moderate kitchen needs?
Appliances are big considerations, as they can be costly to replace, especially if they are built-ins as opposed to freestanding. Lots of people look for stainless steel. You can eyeball the ages and conditions of a home’s appliances and later confirm with the home’s inspection. This is true not only of the kitchen appliances but also includes washers, dryers, furnaces, air conditioners, water heaters, and more.
Some common interior areas to consider are dining areas such as breakfast nooks and full dining rooms, as well as the number of bedrooms, with a focus on what you want in a master suite; sitting areas, balconies or patios, and walk-in closets are just a few of the enviable features of a fine master suite. Plus consider the number of bathrooms you want and the features you want them to have. Your dream bathroom might include a jetted tub, dual sinks, a heated floor, and natural light from a skylight.
Exterior Features to Consider
Often given only slight consideration with home buyers, lot size can be more important than many realize. How much privacy does your outdoor living space afford? What will you use it for? It’s a good idea to think of your lot in terms of expansion, say, building a shed or a garage, or adding an extra room onto the home. If you have any of these exterior expansion plans in mind, it’s a good idea to check out the local laws and codes that apply.
A front yard is your home’s presentation space, what the world sees and what those entering experience as a first impression. Backyards are more personal spaces, used for leisure time and housework and so should fit with your lifestyle. While some may say bigger is better with outdoor space, keep in mind that the more ground you have, the more you’ll have to maintain. The prospect of yard work might make you rethink lot size.
Keep Energy in Mind
Do you want to cook on a gas stove? Does the home have solar panels? If not, what are the zoning requirements and are there good places to add panels? You’ll want to look at the windows; double and triple-pane windows can significantly reduce your heating and cooling costs. For conserving water, keep an eye out for single-flush toilets and tankless water heaters. If there aren’t a lot of ceiling fans, consider that eight to nine feet above the floor is the optimal position for installing a ceiling fan.
Avoid These Common House Hunting Mistakes
- Don’t look at homes beyond your price range; lust for a house that’s out of your league is a common house hunting mistake that could lead to heartbreak.
- Don’t skip over mortgage pre-approval. Having a pre-approved loan in place makes house hunting much smoother.
- Don’t fall for the first home that catches your eye. Shop around for that perfect match.
- Don’t go it alone — have a broker or a real estate agent with you when you speak with a seller’s agent.
- Don’t insist on perfection. If you love a home overall, you can live with some small imperfections that you can change later.
- Don’t overlook big problems. A fixer-upper might seem feasible, but you never want to take on more home-improvement work than you can handle.
- Don’t skip an inspection. Even if you have a conventional mortgage loan that doesn’t require an inspection, it’s still a good idea to get one.
- Don’t give in to desperation. Just like meeting life partners, finding the perfect home can be a long and bumpy road. Home shopping often takes four months or longer. Patience will pay off.
- Don’t jump to make an offer. It might be love at first sight, but best to sleep on it, and do some research such as checking out the neighborhood.
- Don’t dawdle. While you don’t want to leap before looking, you also don’t have the luxury of time in today’s red-hot real estate market. So do your due diligence as soon as you find the home you want and then act. If not, someone else will surely snag your dream home.
And when you do finally meet up with that house you know is right for you, City Lending will be there for all your mortgage needs to ensure that you live happily ever after in your perfect home.
Your credit score plays a big role in your mortgage eligibility. And understanding this is often the key to getting your dream home. Here’s what a credit score is and why it matters when you’re looking to buy a house.
First, what is good credit? From the perspective of your lender, good credit means a history of using the credit you’ve been given in the past with care and paying back previous loans according to their terms. With these positive credit behavior patterns, you are more likely to get approved for a mortgage at a low interest rate with favorable terms.
Credit Reports and Credit Scores Are Not the Same Thing
A credit score is a number that’s assigned to you as an estimation of your worthiness to get credit. A credit report is a detailed look at your credit history. Let’s drill down a bit on each.
- Your credit report shows how much money you have borrowed, how you’ve paid it back, and how much credit that you have available to you. The report includes debts such as student loans, auto loans, and credit cards, among others. Credit reports also show any red flags, such as referrals to collection agencies, long-overdue bills, bankruptcies, and tax liens. You have a right to receive your credit report; federal law requires each of the nation’s big three credit reporting companies to give you a free copy of yours. You should check out your credit report before applying for a mortgage.
- Your credit score is a number between 300 and 850, determined by a number of factors related to how you’ve managed credit in the past, including the type of credit that’s been extended to you and for how long. The most commonly used credit score is the FICO score, created by a data analytics company previously named the Fair Isaac Corporation, now simply FICO.
Factors That Determine Credit Scores
- Payment history is a big factor in determining a credit score. About one-third of the calculation that sets your credit score relies on how you’ve made payments on your bills. Consistent on-time bill paying gets you good marks, late and partial payments will result in negative marks.
- Balance ratios rank a close second. Known in the finance world as a credit utilization ratio, this split between the debts you owe and the amount of credit you have available is hugely important in determining your credit score. Keeping this number under 30% has a positive impact.
- Credit timelines come in third. Got an old credit account you rarely use? Don’t close it! The longer you’ve had a credit account, the better this longevity contributes to your credit score. Conversely, closing longtime accounts could lower your score.
- Your credit mix is also considered. Lenders like to see diversity with credit, giving credence to the fact that you can handle a variety of credit situations. Open credit, revolving credit, installment credit — it all comes together to paint a good credit picture.
- Recent credit activity plays a part. The flip-side of credit longevity, a flurry of recent credit activity doesn’t bode well for a credit score. While not as significant a factor as payment history or balances owed, applying for multiple credit accounts over a short, recent period can put a dent in your credit score.
What credit score do I need to get a mortgage?
This is often the biggest question people ask before they apply for a mortgage loan and the one that weighs the heaviest in their minds as they await approval. While this varies from lender to lender and other factors may influence the results, a credit score of 620 is generally considered the floor for getting approved for a conventional mortgage. A score of 740 or higher is often considered the range to get the best possible terms and best interest rate on a conventional mortgage.
Can you still get a mortgage if your credit score is in the 500s? Yes. Though if your credit score falls below 620, your best bet is usually to apply for an FHA Loan mortgage, as government-backed loans often have lower credit-score thresholds — with higher down payment requirements based on your credit score. If you have a score of 580 or higher, you may be able to get an FHA loan with only 3.5% down. With a score in the 500 to 579 range, you’re probably looking at a 10% down payment to secure an FHA mortgage.
Specifically designed for veterans and active-duty members of the military, VA Loans are similar to FHA Loans in that they are guaranteed by the government, backed by the Department of Veterans Affairs. The credit-score requirements tend to skew slightly higher for VA Loans over FHA Loans; 600 to 640 is a common range for getting approved for a VA Loan, which often has the advantages of 100% financing with no down payment and no requirement for mortgage insurance.
How can I improve my credit score?
While there is no quick fix, there are steps you can take to improve your credit score. If you have long-standing debts, such as student loans, paying them down will help. All the better if you can close out the debt. But don’t close out paid-up credit cards; best to keep these open as longer-term lines of credit positively affect credit scores. If you can’t completely pay down a credit card, making more than the minimum monthly payments will help.
What if my credit score is still too low to get a mortgage?
Whether it’s due to no credit or bad credit, this is an issue many would-be borrowers face. For many, having a co-signer who does have a good credit score is the answer. Another option is to have another person, a family member or a significant other, buy the home and put your name on the title. When your credit score improves, you can then apply to refinance to have the mortgage in your name.
A good credit score can change your life, handing you the keys to the home you desire. And when you’re ready to embrace that change, lenders at City Lending are ready to serve.
Thinking about buying a new home or refinancing? Call today to get pre-approved.
If you’re thinking about buying a new home, your first instinct may be to just get online and start scrolling through real estate listings. But there are a few things you might consider doing before the search starts.
Determine Your Budget
How much can you afford to spend on your new home? It’s a question most folks must ask themselves even before they begin the search to buy a house. To start, you should take a close look at your spending behavior and determine just what you spend each month. On everything from buying food and eating out to transportation, utilities, and all of your monthly bills. Then figure out the amount a monthly mortgage payment can comfortably fit in with these spending habits.
As a rule of thumb, the Federal Housing Administration recommends that your housing payment should be less than 31% of your gross monthly income. Beyond your mortgage payment, this includes property taxes, and in some cases homeowner’s insurance and mortgage insurance. If you don’t have any other debts, you may consider going up to 40% of your gross income toward home payments when you are buying a home, though it’s unwise to take your debt-to-income ratio past 43%.
Get a Preapproved Mortgage
Why would you want the preapproval of a mortgage loan? Peace of mind is a big reason, knowing that your mortgage will be nearly in place when you find that perfect home. Plus, sellers usually like buyers with pre-approved mortgages, offering proof that the buyer is serious and allaying fears that the deal could fall apart with the denial of a mortgage loan. In today’s red-hot real estate market, where bidding wars are common, the buyer with a preapproval letter in hand has the competitive edge.
Just as you would with a mortgage loan, seeking preapproval from a lender means getting a clear picture of your finances. You’ll want to get a copy of your credit report, showing both your credit score and your history of handling debt and credit accounts. And get your financial info in order, such as proof of income, tax filings, documents for any investment accounts, and employment information — these will likely be needed for the preapproval or when it comes time to apply for the home loan.
Is there any difference between preapproval and prequalification?
Yes, while they both aim toward the same goal — making you a better buyer — there are key differences between the two. You might think of prequalification as dipping your toes into the waters of home buying. Those seeking prequalification likely aren’t certain if their finances make them well-positioned to buy a home and so seek a less formal evaluation from a lender. A prospective borrower will disclose their financial information to a lender and the lender will give an estimation of the amount they may ultimately lend. Lenders generally don’t look at credit reports or do deep dives into one’s finances for these estimates, which are designed to give potential homeowners a general sense of the homes they can afford.
If pre-qualification is toe-dipping, mortgage preapproval is fully wading into the waters; those seeking preapproval are usually ready to buy a home and have their finances in order to do so. During the preapproval process, a lender will pull a credit report, look at debts and assets, and verify income as part of an evaluation of the potential borrower’s worthiness to get credit. Lenders will calculate your debt-to-income ratio and the loan-to-value ratio in deciding the amount and rate of the loan. That does not 100% guarantee you’ll get that loan; final approval still hinges on a home appraisal and no changes in your financial situation. But with a preapproval letter, which is often valid for 60 to 90 days, you can have some degree of confidence the loan you’ve been approved for is the loan you’ll get.
Find a Good Real Estate Agent
This is a tough one — there are lots of real estate agents out there! Here are some tips from experts on finding the right real estate agent for you.
- Talk with at least three real estate agents before choosing one, and best if that one is local with expertise in the neighborhood you’d like to live in. The more local, the better. Think of these chats as job interviews — because they are!
- Personal referrals are preferred. While the internet is great, and online reviews and star ratings can be a help, they still don’t trump a person-to-person recommendation from a homeowner who has worked with the agent in the past.
- Find a realist. Like most investments, buying a new home comes with a certain level of risk and you want an agent who is clear-eyed and honest about those risks to help mitigate them. Flash and flattery are not what you need, but rather a realist who will offer no-nonsense analysis of your potential investment.
- Trust your gut. Best to get both sides of the brain working as you select the agent that’s right for you. Left-brain logic will look at the agent’s credentials and track record, while right-brain emotion will give you the feeling of whether this agent is your best choice or not.
Make a Comprehensive Wish List
The last thing you want after closing on your new home is buyer’s remorse. So it’s a good idea to lay out exactly what you want before you start shopping with a home buying wish list. And it could be a long list, but well worth the effort. Your list may help you answer questions like: Do you need to be near public transportation? Do you want a yard and if so, what size? How many bathrooms do you want? And on and on. Making a detailed list will make the shopping stage much easier.
How long will you be shopping for a home?
That, of course, varies, and factors that influence your shopping time may include the time of year and the availability of homes that are currently for sale. A common timeline to buy a house can be four months or more, though the National Association of Realtors found that homebuyers shopped for an average of eight weeks, typically touring nine homes. And then it often takes between 30 and 45 days to handle the closing details. So from the first credit check to that day you have the keys in your hand, it could take as long as six months.
No matter how long it takes, ultimately you will call that new house home. And with City Lending, you’ll have a trusted partner with you along each step of the way.
Knowing the right time to buy a home can be difficult, now made even trickier by a pandemic and ever-changing housing market conditions. But the short answer is, Yes, 2022 is a fine time. Let’s delve into some of the reasons why 2022 is an optimal year for homebuyers.
Home Buyers Benefit from Price Normalization
A majority of housing experts predict that the surge in home prices and the unprecedented bidding wars we’ve seen in recent times will see some cooling, with price growth easing back to numbers that have been the historical norms. Fannie Mae and Freddie Mac each offer somewhat similar forecasts, predicting that we’ll see respective 7.9% and 7% growths in US home prices in 2022. That’s admittedly still higher than norms we’ve known historically, but a welcome relief for would-be homebuyers who have seen home prices skyrocket since the advent of the coronavirus.
Other experts think things look even rosier for homebuyers; CoreLogic and Redefin have released predictive models showing that they forecast price growth over the next year to be at respective 1.9% and 3%. Most industry insiders expect to see this tamping down of home-price rises as a direct result of the inevitable rise in mortgage rates. Nobody expected the unprecedented low mortgage rates of the recent past to go on forever, and signs that inflation and the Fed will each have their say concerning mortgage rates have been impossible to dismiss.
While there is some consensus among experts about the kind of housing market we’re going to see in 2022, housing market forecasters are by no means in agreement on everything. Contrary to Fannie Mae and Freddie Mac, the Mortgage Bankers Association doesn’t think we’ll see an increase in home prices in 2022 at all; they’re forecasting a decrease of 2.5% in the median price of homes. The reason? They’re not so sunny on mortgage rates, which they say may climb to 4% as 2022 draws to a close. While that prediction may jar the jaws of some, we would do well to look back and remember the lowest available mortgage rates of 2006 (6.10%) and 2000 (7.13%) — and north of 18% in 1981! By comparison, 2022 looks pretty good even through the cloudiest of forecast lenses.
Where are mortgage rates headed?
This is some positive news for potential homebuyers. While we may not be looking at the stunningly low mortgage rates of 2021, the rise in 2022 looks moderate. Fannie Mae predicts that the rate of 3.1% we saw as we approached 2022 will rise to 3.4%. Redfin foresees a slightly higher uptick, forecasting we’ll get mortgage rates at 3.6% in 2022. Naysayers will point out that even a rise of .5% will have an impact on a 30-year mortgage. And they’re right. Borrowing, for example, $500,000 at a rate that’s half a percentage point higher could add about $140 to monthly payments. And that adds up over the 30 years. But this increase is offset by the cooling in the rise of the prices of homes, still leaving homebuyers in a fairly good position.
And it’s important to consider that the housing mortgage market doesn’t exist in a vacuum; rising interest rates, even the moderate ones we expect in 2022, almost always correlate with wage increases. So while monthly payments may see a slight rise, so, in tandem, will the earnings of the average homebuyer.
More Homes Means More Choices
Realtor.com’s chief economist Danielle Hale believes, despite supply chain issues tied to the pandemic, we’re going to see a moderate rise in housing inventory with single-family starts going up by around 5% throughout 2022. The National Association of Home Builders echoes this forecast, citing high single-family builder confidence. While the NAHB doesn’t foresee an eye-popping surge over 2021 numbers, they do expect housing starts to rise in 2022, and predict that this rise will be significant compared to pre-Covid 2019 figures: 25% higher. How many new homes? Susan Wachter of the Wharton School of the University of Pennsylvania thinks we’ll see more than one million single-family starts in 2022.
It’s also a good time to consider buying a condo, as single-family homes aren’t the only area where we’re poised to have an increase in construction. Multifamily units will also see an expansion. According to U.S. Census data, at the start of the Fourth Quarter of 2021, permits for the construction of 1.5 million housing units had been approved for the year. Barring any unforeseen setbacks, many of these units will be constructed in 2022.
However, a rise in construction starts isn’t the only reason we’re expected to see an uptick in homes on the market in 2022; foreclosures are on track to rise. No experts are forecasting that we’ll have widespread foreclosures of the unprecedented kind we saw in 2008, but conventional wisdom says a jump in auctions and foreclosure sales are on the immediate horizon. We can look to the pandemic as the reason, hitting homeowners who were already having difficulty making mortgage payments with even more financial stress.
Power Shifts from Sellers to Buyers
Many aspects of our lives took roller coaster rides in 2021, and the real estate market was no exception. Home values jumped at whopping rates, almost 20%. Most experts agree that these leaps will likely settle in 2022 and that we’ll be looking at more reasonable increases of around half the 2021 rates going forward. Realtor.com predicts that in 2022 we’ll see a 12% appreciation in home value, with a rise of 2.9% in median home prices.
This slow in growth rates shifts the power balance somewhat from home sellers to buyers, offering more bargaining power to the latter. So we’ll almost surely see fewer bidding wars and a tempering of the fever pitch we had with competition for homes in 2021. All-cash was king over the past year; sellers had their choice of multiple hungry buyers and leaned toward all-cash deals. But as that fierce competition inevitably wanes, buyers with conventional mortgage loans will find themselves better positioned to get their dream homes.
Ultimately, you’ll have to decide for yourself if 2022 will be the year to make your move. And when you do, the folks at City Lending will be right there by your side to help you begin a new phase of your life in a new home.