If you're hoping to secure a new address in 2020, you've picked an excellent time to enter, or re-enter, the real estate market. Interest rates are still near record lows, and in many areas across the country, buyers are in the driver's seat with plenty of available inventory.
However, even with an excellent climate for buyers, it's unlikely you'll be able to jump into the housing market in the coming year without at least some preparation, specifically around securing the best possible mortgage.
Consider this your checklist for making homeownership a reality in 2020:
- Review your income and spending.
- Sock away that down payment.
- Tune up your credit score.
- Gather your paperwork.
- Choose a broker.
Review Your Income and Spending
Before you can buy a home, you must have a thorough understanding of your current income, assets and expenditures across all categories. This will be integral to establishing your new home budget, and it will also help you obtain a great mortgage rate.
Review your investments, banking and credit card statements thoroughly for accuracy and start to ferret out any unnecessary expenses. While you're at it, evaluate your income to see if it can be increased over the near term. Is it time to ask the boss for a raise? You could also consider looking for a higher-paying job, but keep in mind that changing industries or moving from a salary-based position to a commission-heavy role might raise a red flag for lenders.
Lastly, take some time to review your current housing spending, including rent or mortgage, insurance, monthly homeowners association fees, taxes and maintenance. Are you comfortable with the amount? If not, how much more or less would you ideally like to spend each month?
Sock Away That Down Payment
Many experts agree that homebuyers should aim to have a 20% down payment ready when looking for a new house. While there are many mortgage options that allow for a lower down payment, they typically require private mortgage insurance or a similar regular payment. PMI helps protect lenders if you default on your mortgage, and the lower your down payment and credit score, the more you'll have to pay for PMI, taking a bigger chunk out of your monthly housing budget.
Many HOAs, cooperatives and condominiums require a 20% minimum down payment. Also, a down payment of that size will save money over the life of your mortgage. For example, paying 20% down on a $300,000 home with a 30-year mortgage could save you more than $54,000 over the life of the loan, compared to a 5% down payment.
Tune up Your Credit Score
Income, down payment and credit score are the three driving factors behind what your home loan will actually cost you. Because it can take several monthly reporting cycles to address credit report issues, you can never start boosting your score too soon. The first step is to request copies of your full credit report from all three reporting agencies. While credit score websites like Credit Karma can be great for tracking your score, start with reports directly from each bureau – Equifax, Experian and TransUnion – to ensure you're reviewing the most recent information straight from the horse's mouth, so to speak.
Check each statement thoroughly for errors and mistakes and remedy any mistakes using the exact instructions found on the report. Next, pay down revolving balances as much as possible while still meeting your down payment savings goals. Pro tip: Improving your utilization ratio – the percentage you owe divided by the total credit line – will typically drive up your credit score more than paying off any single card. Aim for a 30% or lower utilization ratio for all credit cards.
To keep your credit score at its highest, you'll also want to avoid any major credit purchases or opening any new lines of credit. It couldn't hurt to engage a credit monitoring service to prevent any fraud during the critical mortgage application process as well.
Gather Your Paperwork
This is the perfect time to organize all the paperwork necessary to buy a home. A typical mortgage application will require the following:
- Federal and state tax returns for the last two years plus associated W-2 or 1099 forms.
- Complete statements for all bank accounts for the last two months.
- Two months of statements for investment accounts plus quarterly reports from your 401(k).
- A detailed monthly debt schedule, including all loans and credit accounts, issuer, balance due and minimum monthly payment.
- Income statement or letter of employment.
- Additional records required may include proof of rent payments, recent divorce decrees, past bankruptcy or foreclosure information, gift letters if anyone is gifting a portion of your down payment and so on.
If you're self-employed, you'll need to prepare profit-and-loss statements and balance sheets to verify your income. Additionally, if you'll be purchasing shares in a co-op building, you'll likely be asked to submit a comprehensive application as well as personal references.
Choose a Broker
While anyone can pull up online listings and visit open houses, a wise real estate agent specializing in your local area is indispensable when it comes to saving time, energy and money. From housing starts to mortgage rates and sales trends, there's a sea of data available on the real estate economy. Trying to make heads or tails of it all and what it means to your specific goals is a challenge, especially when much of it is written for a national audience or a specific editorial agenda.
The "boots on the ground" understanding that an agent provides for your homebuying objectives is invaluable. He or she will guide you through the ins and outs of your local inventory and market trends, and will act as your advisor and champion through the offer and closing process. A skilled Realtor or agent will also have a time-tested network of professionals – from attorneys and lenders to contractors and landscapers – who can help close the deal smoothly and turn your new house into your dream home.
How can you make sure you're selecting the best real estate agent for your needs? Face-to-face interviews are a crucial part of the process. Ask your potential agent about his or her experience in the area, communication style and availability. Don't forget to inquire about fees that you may be asked to cover, as well as any recent success stories and references the agent can provide.
With just a few weeks left in this year, and this decade, now is the time to start preparing if buying a home is on your 2020 to-do list.
Be ready for things to go wrong.
No one loves shelling out money for unexpected expenses, but sometimes that seems like a rite of passage in homeownership. “Most of the time, the unhappy surprises are simply due to people being unaware of the things that can crop up,” says Brad Hunter, chief economist for HomeAdvisor. First-time homebuyers in particular may not know what to expect after closing on a home, and there’s nothing worse than developing buyer’s remorse about one of the largest investments you’ll ever make. Here are eight headaches to prepare for if you’re looking to purchase a house.A suddenly less-than-desirable location
A suddenly less-than-desirable location
Buying a house across the street from a high school didn’t seem like such a bad idea when you saw how nicely renovated it was. But when you don’t have kids and Friday night football games are keeping you up later than you would like, you realize you should have made a pros-and-cons list regarding the location. Don’t let a charming interior override a location you dislike or a lot that will give you flooding problems. “If you don’t like your lot, don’t buy the house, because you cannot change that,” says Kim Wirtz, a Realtor for Century 21 Affiliated in Lockport, Illinois.A high monthly mortgage payment
A high monthly mortgage payment
One of the most crippling headaches to deal with is a monthly mortgage payment you find you can’t quite afford. Lysette Portales, a real estate agent with Century 21 Jim White & Associates in Treasure Island, Florida, says she stresses to clients that they should shop around for a mortgage with multiple lenders and inquire with each about different program options. “A lot of them might be able to do 100 percent [financing],” she says, noting that many homebuyers typically only know about a couple mortgage programs and settle for one without considering what would be most affordable option both now and down the line.Items that are on their last legs
Items that are on their last legs
Whether it's the roof, water heater or furnace, aging home systems will need replacement. And that may end up being sooner than you’d like, especially if you didn’t pay close attention to the age and condition of the roof, plumbing, electric and heating and cooling systems when your inspector pointed them out. HomeAdvisor’s 2015 New Homeowner Survey found that 75 percent of homeowners face an unexpected emergency within a year of purchase. To expect the unexpected, Hunter points to the survey’s recommendation that homeowners plan to spend 1 percent of the home’s purchase price on unplanned repairs. Maintaining at least that much in your emergency fund will help keep you from dipping into other savings from year to year.Old systems
It’s important to pay attention to a home's aging big-ticket items before you even make an offer. “A lot of homebuyers are distracted by how cute a home can be,” Portales says, adding that she makes it her job to point out the age of the roof, air conditioning unit, water heater and more to buyers. Then when it comes time to calculate an offer, you should factor in the cost of those pieces that will need immediate replacement when determining how much you think the home is worth.An air conditioner that's not the same
An air conditioner that's not the same
Wirtz says one of the things in a home that seems to always break or have issues within the first year of its purchase is the air conditioner. But it’s not always because it breaks down – she says it simply might not be as effective as the new homeowner wants it to be. “It may not be cooling like they’re used to,” Wirtz says. You can either learn to deal with a little less cooling, bring in an HVAC pro to inspect and fix any problems or research any DIY fixes that might get it cooling better – like air conditioner cleaning spray.Unseen leaks
Home inspectors aren’t able to see through walls, so the discovery of a pipe leak isn’t uncommon after you’ve moved into the home. But this is one repair you want to make as quickly as possible. “When there’s water that is not stopped, it can create mold – and mold remediation is extremely expensive and extremely difficult,” Hunter says. Mold growth in your home can cause serious health problems, so it’s imperative to address any moisture issues as quickly as possible to avoid it becoming any more dangerous, let alone more expensive.Surprise renovation expenses
Surprise renovation expenses
Fixer-uppers are all the rage these days, as many homebuyers are willing to take on renovation projects in exchange for a slightly lower price tag. But when budgeting for your renovations, leave plenty of room for the discovery of existing problems once your contractor looks behind the walls. The HomeAdvisor survey found 51 percent of homeowners spent more time on home projects than they expected. “Even if you have a fully vetted, well-reviewed contractor … they still might uncover issues that maybe a previous contractor left incomplete,” Hunter says. He recommends leaving around 10 percent extra space in your budget for surprise problems of any kind.Problems that pile up
Problems that pile up
All too often it feels like the problems in a home have a snowballing effect, but you don’t have to go broke tackling them all at once. “Day one, [homeowners] won’t have to tackle all those projects,” Hunter says. “They can use the list of items found by the home inspector as a checklist and prioritize the items on that list and create a budget.” You should immediately address those problems that create a health or safety issue, such as a broken step or leak in your roof that could lead to mold. But replacing an older dishwasher can wait until next year, when you have more room in your home repair budget.Read More
Larson has appeared in The New York Times, Wall Street Journal, The Real Deal and other top-tier outlets for her industry insights and expertise. Recognized among her peers for her eye for design, she has bought, renovated and sold apartments and homes in New York City, San Francisco, Chicago and Nantucket, providing her an acute insight into the needs of buyers and sellers alike.
Lisa holds a Master's degree in History and was a member of the Division I cross-country and track teams at the University of California, Berkeley. Larson also remains actively involved with various charitable foundations, neighborhood associations and at both of her children's schools, and serves as a director on the board of the USA Track & Field Association.