The housing market is about as hot as it's ever been, with low interest rates, a workforce that has shifted to working from home and a potential federal tax credit fueling a rapidly evolving housing market.
In 2020 first-time buyers made up 33% of all home buyers and that number is predicted to increase in 2021.
Buying a home is the American dream for many but it can quickly become a nightmare without the proper information. To help avoid those pitfalls, we sat down with Scott Lindner, National Sales Director for TD Bank Mortgage, to find out how first-time buyers can stay on budget, avoid overpaying and land a dream house they'll love for years to come.
Here's what he had to say:
Buyers should pull their credit months in advance, using free credit services such as https://www.annualcreditreport.com to see if there are any potential issues or mistakes.
If there's an issue, it could take quite some time to correct. Someone with a low credit score is going to have a harder time getting a mortgage – and if they do, the price will be higher. But with a score in the high 700s, a borrower will get the best terms from an interest rate perspective, because lenders perceive them as having lower risk.
Anyone thinking about purchasing a home needs to get a copy of their credit report. It allows people the opportunity to contest things that may not be accurate and or bring any accounts current before applying for a mortgage. It's hard to get that fixed in the middle of the process because it can take months to get things cleaned up off a credit report.
Related: Debunking Homebuying Myths and Investigating How COVID-19 Has Changed the Housing Market
In most cases, it's recommended that a buyer needs at least a 3% down payment. If they're looking for the best rates though, they'll want to have 20% down. So, they should think about how much they have saved for a down payment.
Obviously, this isn't a one-size-fits-all situation, but it's not recommended that anyone puts less money down up front and borrows more just to get a bigger home.
We'll go into detail more later but buyers should think about the monthly payment and work with their loan officer to make a down payment that's best for their situation.
Because of soaring demand for single-family homes and lack of inventory, some people are buying homes sight unseen in an effort to win a bidding war. That's never recommended.
Instead, a buyer should view the property and request an inspection. They should always attend the home inspection. Inspectors will show the buyer where repairs will be needed and can give them cost estimates for those.
If the inspector says the roof is good for another five years, it's good to know how much it'll cost and make a note of that. That can also help with negotiating the purchase price of the home. Or at the very least, the buyer will understand how much future repairs may cost and mentally account for it. If the buyer knows they'll need to spend $10,000 on a new roof, they can create a plan for that, such as putting money aside on a monthly basis.
As mentioned above, there's very little inventory on the market. Now, this doesn't mean rushing a decision or skipping the due diligence part of the process. But if a home really checks all the boxes, a buyer shouldn't wait a week to see it.
In fact, they should go that day and connect with the realtor. Also, expect to possibly make an offer above asking price if there are multiple offers. Again, this shouldn't force anyone into a bad decision, so if the price gets out of one's comfort zone, it's best to walk away.
Most mortgages require a 43% debt-to-income ratio. So, what a borrower should be saying is, "Here's my income, divided by 12," then take their new mortgage payment, including taxes and fees, their credit card payments, their car payments and other debts, and see how close it gets to 43%. The closer they get to 43%, the more difficult it is to repay.
What borrowers need to understand is that's going to pay their mortgage and taxes, but doesn't necessarily include those emergency situations, like when a furnace breaks down or the house needs a new roof. But be conservative and plan for this.
A buyer should figure out other monthly expenses and include car payments, mortgage, taxes and more to see what works for them overall. What's left over to go out to eat or take a trip? They should look at what this all means for to their quality of life.
Also, they should try to look at the big picture.
They may have a car loan that's $500 a month, but it may end in 3-5 months. So, maybe they pay that off in one payment now and then take a look at what another $500 means to their budget. That $500 is no longer included in their debt to income.
First-time homebuyers shouldn't get fooled by the furnishings. Homes are staged for sale with great furniture, nice artwork and more. All that amazing décor may look good, but it's important to pay attention to the home inspection and understand what's really underneath it all.
And conversely, when someone is looking at a house and they don't like the carpet or paint color, they need to be able to look beyond that. It may actually create more of a buying opportunity, because the five people behind them may have felt the same way.
I always tell homebuyers to meet with a knowledgeable mortgage loan officer at the very start of their homebuying process.
Meeting with a loan officer is going to help them understand exactly what they need to do. They're going to ask about credit and make suggestions like paying off a loan or consolidating debt.
What buyers want to be able to do from a basic level, is get a prequalification, identify a property, get all of the documents ready in advance of applying for a mortgage, and get a full approval within two or three weeks of application.
If a buyer feels comfortable doing a $300,000 mortgage on a $400,000 home, that's what they should stick to, not what they are pre-approved for.
No one should go looking for a home over the amount they are comfortable with. The houses realtors will show clients will probably be more and agents may try to stretch their budget to what they're approved for, if they see a pre-approval that's higher than their budget. It's not a knock on them, it's what they are trained to do – so, stick to what you feel comfortable with from a budget perspective, not what the pre-approval says.
There are several free services available to educate oneself and now is a great time to start considering as April is Financial Literacy Month.
The TD Bank Learning Center offers modules and information on how to manage money, owning a home, debt management, budgeting and more.
The TD Finance 101 website provides tips and tools on how to build financial health as well as a First-time Homebuyer Kit to help anyone with a homebuying journey.
No matter where buyers turn, they should always try to understand the basics of budgeting and finance, so that the loan officer and realtor can do the rest!