Buying a house is a minefield full of “I didn’t know thats.” From choosing the right home to qualifying for the best mortgage, you want to minimize the things you don’t know.
So let’s lower your “didn’t-know” ratio. With a shifting lending landscape, unpredictable interest rates and down payment priorities based on your local market, here’s what you’ll need to know about buying a home this year.
What’s the first step to buying a house?
With acute shortages of homes for sale in so many markets throughout the nation, getting a preapproval for a home loan is more important than ever. Cash buyers used to give sellers confidence that a deal would close quickly, but fewer cash buyers are shopping right now. And when houses weren’t in such short supply, buyers didn’t face the pressures of intense seller’s markets. With a lender lined up and a preapproval letter in your pocket, sellers know you’re serious.
“With a preapproval, [sellers] feel comfortable that, ‘Hey, this guy is a legit person who is going to buy and close,’” says Mat Ishbia, CEO of United Wholesale Mortgage in Troy, Michigan.
“[Prospective buyers] need to immediately start with the lender,” agrees Patti Michels, a real estate agent in Hinsdale, Illinois, a suburb of Chicago. “See what you can afford and see what your hurdles are going to be.”
Michels says shopping for homes before gaining a loan preapproval is a big home buyer mistake. “[Some buyers] don’t realize how many underwriting deal breakers there are” that can hijack — or significantly delay — getting a mortgage.
Those home loan approval pitfalls can include issues with student loans, significant recent cash deposits, and the manner in which self-employed income is reported.
How much house can I afford?
‘How much house can I afford?’ is the first-time home buyer question Ishbia says he is asked most often. He offers a rule-of-thumb to help.
“Instead of telling them about debt-to-income ratios,” Ishbia says he tells first-time buyers to consider three times their income as a starting point.
So, if you and your spouse have a combined annual income of $110,000, “most likely $330,000 is your price range, plus or minus a couple of percent,” he says.
But rather than guessing, you can simply take the first step — talking to a lender.
“That’s why you get the mortgage first,” Ishbia adds.
What’s up with interest rates?
Another change impacting the real estate market is interest rate volatility. Many experts predicted rates to steadily rise throughout 2019, yet so far 30-year mortgage rates aren’t far from where they were a year ago. At this point, it’s not clear where they’re headed over the next 12 months.
Michels says it’s definitely a concern for prospective buyers she’s talked to, who are thinking, “let’s do this sooner rather than later.”
In fact, more than a third of Americans say they plan to buy within the next five years — and nearly one-fourth of those prospective buyers say they’ll buy in the next 12 months, according to NerdWallet’s 2019 Home Buyer Report.
What credit score do I need?
A credit score of 620 is typically the minimum that mortgage lenders are looking for, Ishbia says, though some lenders will go as low as 580 or below.
“What I would consider is average credit is 620 to 680,” Ishbia says. “Very good credit is 680 to 740, and if you’re over 740, you’re spotless.”
How much do I need to put down on a house?
“People still think they need 20% down,” Ishbia says. “Three percent down, 5% down are the ways people are buying homes. Ten percent down is the average in the nation right now. You don’t need 20% down to buy a home. It’s the biggest myth out there.”
Except if you’re in a competitive real estate market, Michels cautions.
“I think 20% down — especially in a tight market — is going to come into play,” she says. “If somebody else has 10% and you’ve got 20, that’s going to be a factor.” Michels says listing agents will usually advise sellers to go with the buyer who has the most cash on the table.
“When it comes into play is when you’re up against someone else on a home you really want,” she adds.
How long does it take to buy from start to finish?
“You know what’s changed in the last three years in mortgages? Speed to closing is more important now than ever,” Ishbia says.
Application-to-closing times are shrinking. For the 12-month period ending in January 2019, average closing times for purchase and refinance loans combined were about 43 days, according to Ellie Mae, a mortgage industry technology provider.
For refi loans alone, the average was about 40 days. For the same period in 2015-2016, the averages were 46 days for all loans and 47 for refis.