Buying a home may be the American dream. But with escalating home prices, rising interest rates, low inventory, and inflation, as a first-time buyer, you may be wondering if that dream is out of reach.
Many new homeowners rely on first-time homebuyer (FTHB) programs like low down payment and closing cost assistance to help get in the door. While these are great resources to tap into, it’s helpful to keep in mind that many of these programs apply to homes in a specific price range. For example, in Michigan, down payment assistance is available to homes priced at $224,500 or less, even though those homes are getting harder to find. In fact, the Federal Housing Finance Agency says US house prices have gone up 17.5% over the last year, and according to Zillow.com, there are currently 481 “million-dollar cities” in the US where the typical home value is at least $1 million.
So, what’s the average consumer with a household income of $120,000 or less supposed to do? We asked Steve Cartwright, one of our experienced loan officers at Amerifirst, for tips on how to get yourself in the best shape possible so that you too can start living the dream. Here are his 6 tips:
- Estimate your monthly mortgage payment.
Before you buy, estimate what your monthly mortgage payment will be (you can use an online tool or talk to a loan officer for help), and figure out how you and your family are going to live with this monthly expense. Then, If you can, get into a habit of depositing that amount into your savings account each month—even if it means living with mom and dad while you do it. Lenders love to see a consistent history of deposits! - Talk to an experienced loan officer.
If you’re just starting to think about buying a home, I recommend that you sit down with a loan officer. They can answer all your questions and teach you a little about how the process works even before you pre-apply. Then, after you’ve saved up some money for a down payment and improved your credit score (see below), you’ll be ready to pre-apply for a loan. At that point, you’ll fill out an application and go through a credit check, and if you qualify, the lender will give you a pre-approval letter that you can show sellers to prove you have the financial resources to buy a home. This letter is typically valid for 90 days, so talk to your loan officer about the best time to start this process.
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- Get your credit score in the best shape possible.
Rule number one: don’t use the internet for credit advice. Call an experienced loan officer and ask them to analyze your credit. Many first-time homebuyers make mistakes that drag down their credit, but you can avoid those pitfalls. For example, instead of getting a credit card and maxing it out, keep it at 30% of the credit limit. Also, this is not the time to refinance a car loan to lower your payment, as it will show up as a new loan that can lower your credit score. Choosing not to make payments on your student loans as interest rates rise is also a drag on your credit. - Pump up your savings.
Do everything in your power to save 10% of the purchase price of the home you want to buy. You should have a minimum of $10,000 in the bank when you close. That’s a lot of money, but you’ll need it to cover the down payment, appraisal gap, closing costs, etc. Sellers aren’t agreeing to pay closing costs anymore because it’s a seller’s market, and they don’t have to. - Consider buying a fixer-upper.
If you’re working remotely, you may want to consider moving to an area that’s not so costly. There are still some affordable pockets in the country. For example, there are some counties in the Midwest where you can find houses for $100,000. You should also consider buying a fixer-upper using a renovation loan. With this type of loan, you borrow one amount to cover the home’s purchase price and the cost of repairs, which you can spread out across 30 years. Reno loans also help you earn instant home equity (the part of your home that you, not the lender, own) so you can start building wealth. While affordable, prime-condition homes may be scarce or non-existent, affordable fixer-uppers are much easier to find, so this may be your best viable option. - Use an Appraisal Gap Guarantee.
Last year, over 50% of loans that closed had Appraisal Gap Guarantees. That means the asking price is higher than the home’s appraised value, which can happen in competitive markets. The only problem is that lenders won’t give you a loan for more than a house is worth, minus the down payment requirements of the program you are approved for. However, you can put an Appraisal Gap Guarantee in your offer to get around this problem. Then use your own cash reserves (money you’ll have in the bank after closing) to pay the difference to the seller.