The spring homebuying season is about to kick off, and the housing market is especially daunting for first-time buyers.
Home values have been soaring. Bidding wars are common. For novice home shoppers, it all can feel a bit intimidating.
“There are so many savvy buyers out there that you’re competing against,” says Katie Severance, an agent at Brown Harris Stevens in New Jersey and author of The Brilliant Home Buyer’s Guide.
If you’re a first-time buyer, here are six questions to ask yourself.
1. What’s your credit score?
Mortgage rates remain at rock-bottom levels. But to lock in the most favorable rate, you’ll need a credit score of 740 or above.
Your credit score is the single most important factor in determining your rate. Ralph McLaughlin, chief economist at Haus.com, has analyzed millions of mortgages issued in recent years. He discovered that raising your credit score lowers your rate more than reducing your debt-to-income ratio or boosting your down payment.
So if you have a choice between paying down credit card debt or scraping together a down payment, it’s probably wiser to tackle the debt, because that should help your credit score.
2. What’s your plan for the future?
Put another way, how long do you plan to stay in the house? In general, if you expect to be in the same place for less than three to five years, buying doesn’t make as much sense. That’s because real estate commissions and mortgage closing fees can eat into your proceeds when you sell the property.
One wild card: Home prices have been appreciating quickly. If strong growth in home values continues, then owning a home for just a couple of years can pay off. However, predicting the path of home prices is nearly impossible.
3. How much do you have for a down payment?
This issue isn’t a deal killer, but it does make a difference. If you can put down 20 percent — $60,000 on a $300,000 home — you’ll avoid private mortgage insurance (PMI). If your down payment is less than 20 percent, you’ll have to pay PMI.
Loan programs through the Federal Housing Administration and the Veterans Administration allow you to make small down payments — 3.5 percent for FHA loans, and nothing down for VA mortgages. However, those loan programs carry higher fees.
4. Can you handle the costs of insurance, property taxes and maintenance?
Getting into a home is just the start of the financial commitment. Once you’re a homeowner, you’ll have to pay not just principal and interest but also homeowners insurance and property taxes.
Homeowners insurance varies widely by location. In some states, you’ll barely notice your insurance premium. In others, particularly in hurricane-prone areas, rates have been rising sharply.
Property taxes are similarly all over the map. The bill can be more than $10,000 a year in some parts of Connecticut and New York, and less than $1,000 in other areas.
And owning a home means you’re now responsible for an endless array of expenses — lawn care, repainting, AC service, appliance replacement. The bottom line? Make sure you build the extra costs of homeownership into your budget.
5. Are you ready for some high-stakes homework?
If you answered the first four questions favorably, you’re ready to buy. But in a competitive market like today’s, you’ll need to spend quite a bit of time touring homes and studying property values, Severance says.
Doing plenty of homework will give you a better feel for the market.
“If you’re making an offer on the first house you see, and you don’t know the market, it’s scary,” Severance says. “That’s how you end up overpaying.”
6. Are you willing to wait?
The coronavirus housing market has been characterized by record-low inventories and strong demand — and prices have been soaring as a result.
However, it’s possible that the housing market will return to normal later this year. More homes should come onto the market in the second half of 2021, and price pressure should ease, says Frank Nothaft, chief economist at real estate data firm CoreLogic.
“Prospective sellers with flexible timetables have opted to delay listing their home until the pandemic fades or they are vaccinated,” he says.