How to Prepare to Buy A Home in 2021

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So you want to buy a home. But how do you prepare for the crazy competitive seller’s market we’re currently in? And what is a seller’s market, anyway? A seller’s market refers to when the real estate market has more buyers than sellers. So how can you prepare for this market to make sure you have an edge over your competition?

Get to know your finances. 

It’s important to know where you stand with your finances. While there are many aspects of your finances you should be aware of, we’re going to focus on three components: Credit Score, DTI, and savings.

Credit Score

Your credit score is important. Mortgage companies use it to help determine how much it will cost to borrow money for your home. Sometimes a few points on your credit score can impact your monthly mortgage payments, so you want to make sure you’re credit is in tip-top shape before you apply for your mortgage.

For example, most lenders use the FICO credit score. If you’re at 800 or higher, you’re considered to have exceptional credit, while 579 or lower is considered poor credit. There are plenty of ways you can work on improving your credit score prior to applying for your mortgage. Check out this blog for more: https://www.bankrate.com/mortgages/how-your-credit-score-affects-your-mortgage-rate/.

DTI Ratio

You also want to familiarize yourself with what your estimated DTI is. What is DTI? It stands for debt to income ratio. It’s another factor that mortgage lenders use to determine your rates. To calculate a DTI estimate: (Monthly debt/current monthly gross income) X 100. You can also find plenty of DTI calculators if math isn’t your favorite subject.

A DTI of 20% or less is what the Federal Reserve considers a low DTI. A DTI of 40% or more is considered high and could be signs of the borrower being someone who has signs of financial stress.

Savings

How much cash you have saved up for your home is important. Transaction costs can include money for your earnest money deposit, money for your down payment, and money for closing costs. Outside of the transaction, you’ll also need to consider things like moving costs (storage space rentals, boxes, tape, truck rentals, moving companies, etc.). It’s important to be aware of these costs and how much money you have for them before you apply for your mortgage.

Gather paperwork ahead of time.

You’ll want to gather your paperwork before you start your home search. This helps you from scrambling last minute to find something important that could delay closing. Financing issues account for 37% of delays to the closing table (according to NAR). To avoid any delays in getting your dream home, make sure you have all these documents available.

Important documents include: Pay stubs, W2s, 1099s, bank statements, gift letters (if applicable), address/rent history for the past 2 years, employment history, proof of any other income, Child support/alimony, debts like car loans, current home mortgage, credit cards, student loans info, non-liquid asset info like life insurance, debts, and information on stocks & bonds.

Ask questions and get answers.

Man and woman in cafe looking at computer screen together.

When you’re looking for a real estate agent, be sure to ask questions. Your agent is your partner and home buying resource throughout this home buying experience, so you’ll want to make sure they are a good fit.

Ask agents about their communication preferences, familiarity with your area, and how long they’ve been in the industry. Your agent should be able to have a dialogue with you to make sure that you both have the same expectations.

Do a little detective work.

Your agent can be a great resource, but you should always do a bit of research on your own to determine what it is you want in your future home. Ask yourself if you’re looking for your “starter home” or if you’re ready to find your “forever home.”  Look at neighborhoods and what style of home you’re interested in. Decide what’s important to you in a new home, whether it be your morning commute to work or proximity to nearby amenities.

It’s also important to determine what you want vs. what you need in your future home. What features do you absolutely need to have in order to live your day-to-day life, and what features would be nice to have, but not a necessity? Check out our blog on wants vs. needs to determine what your list looks like: Wants Vs. Needs

Make sure you get pre-qualified for your mortgage.

Pre-approval in today’s market is not only a suggestion, it’s often a requirement. Pre-qualification is important for all potential buyers. You can even check out HUNT Mortgage’s Pre-Purchase Commitment program, which is a great way to show a seller you’re serious about your offer. It provides a fully underwritten commitment, subject only to collateral conditions and to reassure sellers, HUNT Mortgage backs its commitment with a $1,000 guarantee*. If a buyer does not close on a transaction due to the buyer’s mortgage application failing, we will pay the seller $1,000. The guarantee distinguishes HUNT customers from other buyers a seller may be considering.

Buying a home can be intimidating, especially when you’re a buyer in a seller’s market. However, with the correct preparation and agent, you can make the entire experience less stressful, and even enjoyable. While it is a red-hot market, there’s still plenty of opportunities for you to find your perfect home.

Disclaimer: *The guaranty is null and void if:  a) The property is not deemed acceptable collateral for the loan due to value and or condition; b) The buyer or seller willfully cancels the transaction; c) The buyer voluntarily terminates employment and or voluntarily divests assets prior to closing; d) The buyer takes out new credit after the Pre-Purchase Commitment is issued; e) The seller is unable to deliver clear acceptable title;  f) Guaranty is only on owner occupied single family transactions; g) The transaction does not close due to a contract contingency not being met other than the mortgage financing; h) Pre-Purchase Commitment was issued with maximum specific sale price and taxes, guaranty is void if either of these are exceeded; i) The contract closing is dated past the expiration of the Pre-Purchase Commitment. Guaranty is only on Pre-Purchase Commitments issued by HUNT Mortgage

Mortgage Pre-Qualification

A photo of happy expecting couple using digital tablet on sofa. Loving young partners surfing internet at home. Both are wearing casuals in brightly lit room.

Getting a mortgage pre-qualification is important in today’s competitive market. It’s almost a necessity when you’re ready to place a serious offer on a house. For most homebuyers, this is the first step in the home buying process.

Why should I get pre-qualified?

Pre-qualification letters show the amount you’ve been pre-qualified for and are based on your current credit history, income, assets and debt. However, pre-qualifications do not go through a full underwriting review by the lender, so it’s not a commitment to provide you a home loan. 

What information do I need to provide to get pre-qualified?

Since your lender will need to review your financial situation, you’ll need to provide some information and documentation. You could be asked for:

  • Social Security Number
  • Employment history (minimum of 2 years)
  • 2 most recent paystubs (to verify proof of income)
  • Tax documents
  • Bank account information (account numbers, statements)

Is there something that could make my offer more competitive?

A pre-qualification is a great way to show sellers that you are serious about your offer. The HUNT Mortgage Pre-Purchase Commitment Program is an even better way. The HUNT Mortgage Pre-Purchase Commitment Program delivers a fully underwritten commitment, subject only to collateral conditions and to reassure sellers, HUNT Mortgage backs its commitment with a $1,000 guarantee*. If a buyer does not close on a transaction due to the buyer’s mortgage application failing, we will pay the seller $1,000. The guarantee distinguishes HUNT customers from other buyers a seller may be considering.

Contact HUNT Mortgage (link to contact page) or call 888.433.8373 to discover how you can apply for your own no-cost, no-obligation Pre-Purchase Commitment that gives you a competitive advantage when you shop for a home. By getting a commitment for your financing upfront, you can truly enjoy the process of shopping for your dream home.

Disclaimer: *The guaranty is null and void if:  a) The property is not deemed acceptable collateral for the loan due to value and or condition; b) The buyer or seller willfully cancels the transaction; c) The buyer voluntarily terminates employment and or voluntarily divests assets prior to closing; d) The buyer takes out new credit after the Pre-Purchase Commitment is issued; e) The seller is unable to deliver clear acceptable title;  f) Guaranty is only on owner occupied single family transactions; g) The transaction does not close due to a contract contingency not being met other than the mortgage financing; h) Pre-Purchase Commitment was issued with maximum specific sale price and taxes, guaranty is void if either of these are exceeded; i) The contract closing is dated past the expiration of the Pre-Purchase Commitment. Guaranty is only on Pre-Purchase Commitments issued by HUNT Mortgage

Stop Stressing: You Don’t Need a 20% Down Payment to Buy a Home

glass jar tipped over with pennies, nickels, dimes, and quarters spilling out

Many Americans may be unnecessarily talking themselves out of homeownership. Thirty-seven percent of nonhomeowners say not having enough saved for a down payment is holding them back from homeownership, but 62% of Americans incorrectly believe you have to have at least 20% of a home’s purchase price to buy, according to NerdWallet’s 2020 Home Buyer Report.

“These days, you don’t need to put a full 20% down on a home,” says NerdWallet home and mortgage expert Holden Lewis. “Lenders offer mortgages with far less — as little as 3% down — which allows far more people to get into homeownership sooner.”

So, how do you know just how much you need to save up based on your specific goals? It requires a little strategizing.

Before you can zero in on a down payment target, you have to determine how much home you can afford and when you’d like to start home shopping. First, set your homebuying budget with a home affordability calculator to get estimated monthly payments based on various home prices, down payment amounts and locations.

Then, set an approximate timeline. Maybe you’re planning a wedding and know you won’t be ready to purchase for at least two years, or you’re just starting a graduate program and want to give yourself five years to find employment and settle down after graduation. Be realistic and account for your life circumstances.

With a homebuying budget and estimated timeline, you can start running numbers to set a down payment savings goal.

1. Is saving 20% by your goal date realistic?

Calculate 20% of that homebuying budget and determine if it’s feasible to stash that amount away in the time you’ve allotted.

If the answer is yes, great! A big down payment doesn’t only lower monthly payments, it can save you thousands of dollars in interest over the life of the loan and eliminate the need to pay private mortgage insurance.

If it’s no, you have two options: Revisit your goal parameters — opting for a less expensive home or pushing out your target date — or consider a smaller down payment.

Example: For a $250,000 home, someone starting with $0 saved would need to save about $1,400 each month to reach a 20% down payment in three years. For most folks, that’s a stretch. Adjusting the timeline to five years would require monthly savings of about $800. While that may be more realistic, a smaller down payment could get you in a home sooner and with less stress to your monthly household budget.

2. How much can you save by your deadline?

What’s the most you can save monthly for your down payment goal? If you don’t already know the answer, create a monthly household budget to help figure out where your money is going and how much you can set aside.

At a high level, allocating 50% of your post-tax income toward your needs, 30% toward your wants, and 20% toward savings (including your down payment) and debt repayment is a sustainable approach. But by accounting for all of your income and spending, you may realize you can sacrifice a little of your dining out and entertainment money (wants) temporarily to make homeownership a reality sooner.

Example: You decide you can set aside $350 each month. If you’re still hoping to start home shopping in three years, this would leave you with $12,600, or a 5% down payment. Because many lenders accept down payments of 5%, and even lower, you’ll be in a good place to buy around your three-year target date.

3. Do you qualify for down payment assistance?

Even setting aside $12,000 in three years can seem out of reach for some people, but all hope is not lost. First-time home buyers, or those who haven’t owned a home for the past three years, may qualify for down payment assistance, a grant or loan to cover some or all down payment costs. And in some cases, repeat buyers may qualify.Such programs can both shorten the path to homeownership and free existing savings for closing costs, moving or other homebuying expenses.

Weighing the trade-offs of a high vs. low down payment

A down payment doesn’t have to stand in the way of homeownership. Smaller down payments and down payment assistance programs can help you achieve your homebuying dreams more quickly and leave you some savings for an emergency fund or unexpected repairs.

It’s worth considering, too, since there’s no guarantee your $250,000 homebuying budget will get you the same type of property in three years as it would if you bought sooner. Home prices have been rising, but what will happen in the future and what it could mean for your down payment target is hard to know.On the other hand, a bigger down payment can equate to a better interest rate on your loan, lower monthly payment, more equity in your home right away, and not paying monthly for mortgage insurance. Because you’re borrowing less money, you’ll pay less in interest over the life of your loan and have lower monthly payments.

How much of a down payment you need is ultimately a personal decision, a balancing act between financial factors and how quickly you want to achieve your dream of homeownership.

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Elizabeth Renter is a writer at NerdWallet. Email: elizabeth@nerdwallet.com. Twitter: @elizabethrenter.

The article Stop Stressing: You Don’t Need a 20% Down Payment to Buy a Home originally appeared on NerdWallet.