Timing a new home purchase can be tricky. Should you start looking in the spring or in the summer? Should you wait for lower interest rates, or make an offer on a house you love even though the price is higher than what you budgeted? These are a few questions you may be pondering if youâ€™re considering buying a house.
Itâ€™s common to look for cues about the best time to buy from the local housing economy or from what friends and real estate agents say, but the answer often lies closer to home â€” with an honest look at your personal finances. Weâ€™ll delve into some facts and figures to help you answer the question: When is the best time to buy a house?
Your kitchen table may be covered with listings of all the homes youâ€™re interested in, detailed analyses of mortgage interest rate trends, historic home price appreciation and a plethora of other technical financial data about the timing of a home purchase. None of that information will matter if you arenâ€™t financially ready to buy a home.
So how do know when youâ€™re financially ready to buy your home? Weâ€™ve come up with five sings to help you determine if your homebuying timing is right.
Before you ever speak to a loan officer, do some soul searching about your payment comfort zone â€” that is, how much you can comfortably afford to spend on a monthly mortgage payment alongside other regular expenses. This might be an unfamiliar concept, but taking the time to seriously consider your payment comfort zone may result in a different monthly payment target than the â€śmaximum qualifyingâ€ť number youâ€™ll receive from a lender.
The Consumer Finance Protection Bureau considers 43% to be the maximum debt-to-income ratio (DTI) to meet the definition of a â€śqualified mortgageâ€ť â€” the stamp of approval from the regulatory powers that youâ€™ll be able to afford your mortgage. Just multiply your monthly income by .43 and youâ€™ll arrive at the government recommended total debt number. For example, if you earn $6,000 per month, your total debt including your monthly mortgage payment shouldnâ€™t be more than $2,580. But is that really your payment comfort zone?
Start by asking yourself questions like how much do you take home every month after health insurance, retirement savings, local and federal taxes and Social Security deductions? What about your gym membership, the kidsâ€™ karate classes and the new organic food regimen that just pushed your grocery budget from $400 per month to $600?
When you start subtracting the realities of your month-to-month budget from your take-home pay, $2,580 of mortgage and other debt may not leave you much breathing room for a sudden pipe burst in a bathroom, or an air conditioner that takes its last breath on the hottest day of the summer.
Once youâ€™ve worked the numbers backward from all of your monthly expenses â€” not just the ones the lender uses to get you preapproved for a mortgage â€” youâ€™ll have an honest idea of what you can comfortably afford.
Hereâ€™s a side-by-side review of the money left over from a $6,000 monthly income when considering your organic fruit diet, martial artist kids and your monthly commitment to fitness, assuming you take home about 75% of your before-tax income.
|Money left over just looking at 43% DTI||Money leftover after expense reality check|
|$6,000 before tax income||$4,500 take-home pay|
|($2,580) suggested expenses for 43% DTI||($600) (gym membership/karate/organic grocery markup)
($2,580) suggested by 43% DTI
|$3,420 extra income suggested by lending guidelines||$1,320 actual leftover real-life income|
If your monthly income before taxes is $6,000 and you buy a house using the 43% rule based on your real life take home pay and additional expenses, youâ€™ll have $1320 left over every month for gas, groceries, utility and all other bills.
Make sure thatâ€™s enough cushion for your month-to-month expenses, and if itâ€™s not, start scaling back your monthly payment cushion until youâ€™ve got more breathing room in your monthly budget to comfortably cover your day-to-day spending and other obligations.
Besides your DTI ratio, your credit score is the most important factor in getting you approved for and snagging the best rate on a mortgage. Youâ€™ll want to get your credit in good shape before you start shopping for a mortgage.
Start by checking your credit reports for errors because mistakes could be dragging your score down. Youâ€™ll want to initiate any disputes to correct errors at least six months before you shop for a mortgage, because lenders will require you to pause any disputes in order to get your mortgage approved.
Next, review your credit scores and the factors that may be bringing them down. (Find them at https://my.lendingtree.com.) While it does take time to improve your score, one way to boost it quickly is to pay down your credit balances. This will improve your utilization ratio, or the amount of credit youâ€™re using compared to the amount of credit available to you. Try to do this at least three to four months before you apply for a mortgage so the credit bureaus have time to reflect any payments youâ€™ve made. And focus on making all your credit payments on time.
When you were in the process of determining your payment comfort zone, you probably spent some time crunching down payment numbers. Generally, the more you put down, the lower your overall payment will be.
A 20% down payment will help you avoid mortgage insurance on a conventional loan, but even if you donâ€™t have that much saved, every extra 5% down will save you money. Mortgage insurance (also called private mortgage insurance or PMI) protects lenders against losses if you default on your loan. The less you put down, the more PMI you pay monthly on a conventional mortgage.
The table below illustrates the impact every additional 5% down makes on a $200,000 house if you have a 760 credit score and take out a 30-year fixed rate of 4.25% on a conventional loan in Arizona.
|Down payment||Loan amount||Monthly mortgage insurance||Total monthly PIMI (Principal/interest/mortgage insurance)|
In addition to your down payment, financial planners often recommend having three to six monthsâ€™ worth of basic expenses in an emergency fund. Lenders also like to see extra money in the bank so they know you have the funds on hand to make extra payments or cover unexpected home repair expenses.
Itâ€™s easiest to qualify for a mortgage if you have a salaried job or a full-time hourly position. If you have a position that only has a temporary base pay that will end in the near future, you may have a hard time getting approved. If youâ€™ve been in a commissioned or self-employed position for at least two years and show enough income to qualify on your tax returns, then this is a good time to buy.
You may hear the expression buying a home is one of the biggest investments youâ€™ll make. The most disciplined investors also talk about looking at the long term versus the short term.
When it comes to real estate, the â€ś5-year home sale ruleâ€ť refers to the fact that you have a better chance of recouping the cost of buying a home if you stay in the home for at least five years. By that time, youâ€™ll have made 60 mortgage payments, and in most cases, youâ€™ll see home values in your area gradually rise.
The combination of these factors usually results in a sweet spot for reselling after five years. This is important because as a home seller, youâ€™ll be paying all of the real estate commissions for the services agents provide to sell your home. Those fees can be as high as 6% or more, and thatâ€™s money that comes off the top of the profit you make.
The example below shows how the 5-year rule works. It assumes you put down 5% on a $250,000 home with mortgage rate of 4.25%, the market appreciates 6% per year for the next five years (it has averaged 7-8% per year since 2007-08), and selling costs total 8%.
|Year since purchase||Home value at 6% annual appreciation*||Principal balance||Total equity||Selling costs 8%||Net profit at sale|
|*Average appreciation rate since the 2007-08 financial crisis|
Itâ€™s impossible to know exactly what interest rates are doing, but if you see a lot of news about rates dropping, itâ€™s worth it to get a payment quote. From December 2018 to August 2019, mortgage rates offered for many mortgage programs dropped nearly one percentage point, which has a huge impact not only on your monthly payment, but on how much interest you pay over the life of the loan.
Weâ€™ll look at how a one percentage point reduction in the interest rate can make a monthly payment difference for a $150,000, $250,000 and $350,000 loan. Using the 5-year rule, weâ€™ll also look at how much extra equity and interest savings you realize by the time you make your 60th payment (12 months of payments x 5 years = 60 payments).
|Loan amount||Monthly payment at 4.75%||Monthly payment at 3.75%||Monthly payment savings||Interest savings over 5 years at 3.75%||Extra equity at 5 years|
The bigger the loan amount, the more the impact on your monthly payment savings, total interest costs and equity build up. This makes shopping around for a mortgage and locking in a rate when you find the best deal even more important.
The price you pay is just as important as the interest rate when it comes to buying. When home prices level off or rise at a slower pace, sellers tend to put their houses on the market at a more rapid pace, as they worry they may miss out on getting top dollar if prices stall out.
Thatâ€™s good news if youâ€™re a buyer, because more houses for sales may mean lower prices. Sellers may also consider contributing toward your closing costs or help you buy discount points to get a lower rate. This is also known as a â€śbuyerâ€™s market,â€ť because it tends to be more advantageous to buyers than sellers.
Sales price also affects how much money you need to put down, so getting the best price will help you leave some of that down payment money in the bank to build up your emergency fund even further. Hereâ€™s an example of the effects of a 5% difference in price on your down payment, and assuming the seller is willing to pay 3% of your closing costs.
|Sales price||5% down payment||10% down payment||3% seller paid costs|
If you can buy a home for $200,000 versus $220,000, youâ€™ll save $1,000 in down payment (assuming youâ€™re putting 5% down), and the seller can potentially pay $6,000 in closing costs. The most common signs that the market is turning in your favor are â€śFor Saleâ€ť signs. If you start seeing more of them popping up in your area or in a neighborhood youâ€™ve had your eye on for a while, chances are youâ€™re entering a buyerâ€™s market.
Spring and summer are the most popular times to buy. Summer can be especially expensive for families to buy because sellers know there is pressure to find something and get settled before the start of the school year. Conversely, fall and winter are slower seasons for home sales. As a buyer, there are some months and even days when you might be able to save a bundle of cash if youâ€™re able to make an offer and close during unpopular selling months.
October consistently ranks in the top three months for buyers, according to an analysis by ATTOM Data Solutions that examines dates from 2011 to 2018 during which sellers were least likely to charge a premium for single-family homes and condos. During this time, sellers are likely to accept premiums that are one-half to two-thirds lower than the highest premium months of the year (March to July).
With kids back in the full swing of school, sellers lose a big pool of prospective buyers, giving you an advantage as a prospective homebuyer.
While many people are in the thick of holiday events and get togethers, homebuying may be the furthest thing from their minds. Sellers who need to sell in December will often give buyers extra motivation to consider their homes during the holiday season, and buyers prepared to forgo a cocktail party or two may be rewarded with substantial benefits.
If your New Yearâ€™s resolution includes home ownership, January may be a great month to look as well, according to ATTOMâ€™s data. While most people are signing up for gym memberships, focusing on house hunting may save thousands of dollars in home costs instead of inches off your waistline.
The good thing about home prices and interest rates is that they tend to move slowly, giving you time to prepare yourself for the homebuying journey. In order to take advantage of deals to buy a house, you need to have your financial house in the best shape possible.
Not only will you potentially save money with a lower rate or price on the home you buy, but the loan approval process will be much easier if you buy within your means and are able to demonstrate strong credit scores, solid income and plenty of money in the bank.
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