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Buying a home is a key part of the American dream. But if you purchase at the wrong time, you may be dreaming you’d have put more thought into your timing. The best time to buy a house isn’t just determined by when prices are lowest. Your personal finances (including debt and savings), as well as trends in your market and the state of the interest rate, are also key factors.
Top Selling Months
When selling a home, spring is king. The months of April, May, June, and July are the best time to sell a home because sellers can get the highest offers and sell more quickly. You’ll see more homes on the market during this time for that very reason.
If you have some flexibility, consider avoiding this peak selling season when purchasing a home. While you won’t have as much selection, sellers may be more willing to negotiate with you on price. You’ll avoid paying top dollar and can either find a home for a cheaper price or get more for your dollar.
Evaluate Your Finances
Even if the market is ripe for home buyers and you’re itching to move into a new abode, it doesn’t necessarily mean it’s a good time for you to buy. The single most important factor when determining if you’re ready to purchase a home is your personal finances. If you buy a home before your finances are in order you might not be approved for a home loan in the first place, or you may set yourself up for disaster by overshooting what you can actually afford.
If you’re looking for a good rule, most experts say your monthly mortgage (including insurance and property taxes) should cost no more than a third of your monthly take-home pay. This ensures that once you purchase your new home, you can actually afford to keep it (and do those other necessary things, like eating and driving to work.)
Your debt may also play a role in this equation. If you have a high monthly student or car loan payment, you’ll want to reduce the amount you set aside for your mortgage to reflect that debt. When getting approved for a mortgage, lenders like to see a steady stream of income over the last two years. Now isn’t the best time to make any big job changes.
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Your credit score not only determines whether you qualify for a home mortgage, but it is also used to determine your rate and terms if you are approved. A credit score (or FICO score) takes several things into consideration — including your payment history, the amount owed, length of credit history, amount of new credit, and credit mix. The score ranges from 300 to 850 with a higher score showing that someone is less risky to a lender.
Scores above 760 receive the lowest interest rate on a mortgage — which could save you tens of thousands of dollars over the 30-year life of the loan. So, it’s important to review your credit score often, check for accuracy, and dispute any errors. If you have a low credit score, you may consider working to raise your score before applying for a loan so you can get a more desirable rate.
Not only will your debt affect your credit score, but banks also look at it to determine your debt-to-income ratio to decide whether you qualify for a loan with them. Despite having a great income, if your debts bring that number down significantly, a bank may determine that you’d have a difficult time making your payments and turn you down.
Your debt-to-income ratio is your total monthly debt payments (including credit cards with balances, personal loans, student loans, car loans, back taxes, home loans, etc.) divided by your gross monthly income. Many lenders require a debt-to-income ratio below 43% in order to approve you for a new home loan. If you’re above this number, you’ll need to pay extra toward your debt or consider a cheaper home.
Down Payment Savings
If you’re able to scrounge up 20% of your new home’s purchase price in cash for a down payment, not only will you have a lower monthly mortgage payment and have your choice of lenders, you’ll avoid having to pay for private mortgage insurance (PMI). Lenders like you to have some equity in your home the moment you purchase it (usually 20%). This protects them from losing out if they would need to foreclose and the home sells for less than you owe. So, may lenders require you to purchase PMI if you have a down payment less than 20% and it can cost you anywhere from 0.5% to 5% of the total loan amount. For perspective, on a $180,000 loan, if PMI was 1%, you’d pay $150 per month.
Aside from savings for a down payment, you’ll also want to make sure you have enough for a small emergency fund and for the cost of moving. And don’t forget about closing costs — buyers pay about 2% to 5% of the purchase price on average in closing costs on top of their down payment.
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Real Estate Market
Aside from the best month or season of the year to buy, you’ll want to consider the housing market in the area where you’re looking to buy. First run the numbers on whether it’s more beneficial to rent or own in the current market and be sure to factor in expenses you’d need to pay for owning your own home — things like home maintenance, mortgage interest, and homeowner’s insurance.
Also, take a look at whether your particular market is a buyer or seller’s market. If prices are low and there is less demand for homes, the market is a buyer’s market and you’ll have been lucky getting a good deal on a home. Local trends fluctuate independently of national markets, so it’s important to work with someone experienced in your area. But, even real estate professionals have a difficult time predicting just what home prices will do.
The Federal Reserve increased interest rates three times in 2018, but then lowered them three times in 2019 despite some projections that they would hike them again. As of December 2019, the federal funds rate was 2.25%. Interest rates for mortgages have been relatively stable in recent years, but it isn’t always this way. In 1979, the rate was a whopping 20% to combat double-digit inflation.
If you see a trend of interest rates falling, you may save some on your monthly payment by holding off. But if rates are rising, you might want to make your purchase sooner rather than later. A $200 fluctuation in monthly mortgage payment could make a big difference in your budget.