Since 2020, real estate prices, mortgage interest rates and competition among buyers have increased, significantly impacting younger homebuyers. As a result, prospective buyers often feel increasingly uncertain in today’s housing landscape.
According to Bank of America’s new Homebuyer Insights report, 57 percent of prospective and current homeowners are unsure whether it’s a good time to buy, compared to 48 percent last year. This trend is even more prevalent among first-time homebuyers, and 62 percent shared that they are unsure whether or not to buy.
Here are some of my most frequently asked questions that can help first-time home buyers feel more prepared and confident.
How does a good credit score help in the home-buying process?
Boosting your credit score before buying a home can help you get a lower interest rate when it’s time to buy. A high credit score indicates lower risk to the lender and reassures lenders that they will be paid back. It’s important to avoid late payments and maintain a low credit utilization ratio to demonstrate responsible credit habits. Your credit score can change every month, and even a slight increase can help when applying for a mortgage.
How much can I comfortably afford? Should I borrow more?
Many buyers begin the process by asking themselves, “How much could I borrow?” Prospective buyers should really be asking themselves, “How much should I borrow?” A general rule of thumb is multiplying your monthly income before taxes by 28 percent. The resulting dollar amount is typically how much a manageable monthly payment might be, including taxes, insurance and private mortgage insurance. I recommend using an online affordability calculator to do the math.
Are there other programs or options available to help me afford to buy?
Yes. Many people overlook first-time homebuyer loan and grant programs when shopping for their first homes, but grants can help make homeownership more affordable.
For example, as part of Bank of America’s Community Homeownership Commitment, qualified buyers can receive up to $7,500 to cover closing costs through America’s Home Grant.
Do you know your actual budget?
It’s important to review your monthly expenses compared to your net monthly income. Are you comfortable with adding a mortgage payment? If you need more room in your budget to save, it’s helpful to separate your expenses into “need-to-have” and “nice-to-have” categories. Keep track of where your money goes each month and balance your budget.
Have you shopped till you dropped?
Finding and trusting the right partners to help you navigate the home-buying process will make a significant difference in your experience and could save you money. Do your research by shopping around for different mortgage rates. This is the most effective way to understand the potential costs associated with a mortgage. If you like one lender, but its offer is missing something you saw in another offer, communicate that. In many cases, lenders are eager to earn your business and may be willing to work with you.
Will renting have a long-term impact on me financially?
Knowing when and how to buy a home in the current market can feel like an insurmountable challenge. Between a new report that found renting is cheaper than buying a home in the 50 largest metros and the long-held belief that building equity through homeownership is important for accumulating wealth, both renting and buying a home can be appealing options, depending on your circumstances. Buying a home is an inherently personal decision. Prospective buyers must weigh their financial situation, current interest rates and the competitiveness of the housing market.
While renting might be the best choice for you right now, if you are interested in buying a home within the next few years, it is important to prepare your finances and put yourself in a stronger position.
What are your top tips for preparing to buy a house?
• Prioritize your credit score. A higher credit score can make it easier to get a loan or borrow at more favorable rates. Consumers are entitled to one free credit report a month, so be sure to check your credit report regularly and promptly correct any inaccuracies.
• Save, save, save. Having cash ready can help you tackle down payments, maintenance costs and any unexpected expenses when buying a home.
• Minimize debt. Target one debt at a time (highest-interest debt first), always make at least the minimum payment on your credit cards and loans and consolidate debts when possible.
While buying a home can be daunting, the most important thing you can do is to start early and familiarize yourself with the process. Taking stock of where you are financially, understanding your budget and getting a sense of what that budget can buy can prepare you to take that next step when the time is right.
Hope Wright is a credit solutions advisor in Bank of America’s consumer and small banking division. Based in Little Rock, she serves households across the region by providing home mortgages and other financial solutions.
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