2/22/2019 | Casey Fleming – I am often asked if now is the best time to buy a home. The correct answer is always “it depends.” What are your circumstances? Why are you thinking about buying now? Why would you wait? Are you qualified to buy now? Are you ready for the financial and emotional commitment of homeownership today?
This question came up today because I met with yet another young couple who were waiting for the perfect time, when they were actually perfectly ready to buy right now if they wanted. They were concerned because they hadn’t saved up 20% for the down payment yet, because they weren’t sure if their incomes would qualify, they were nervous about their credit, and they wondered if they were thinking of buying a home just before the market crashes again.
Let’s take a look at these concerns.
You don’t need a 20% down payment
One of the biggest myths among home buyers is that they must have 20% down. Actually, Fannie Mae and Freddie Mac (the ultimate sources of the best rates available) require only 3% down. It’s true that you’ll pay mortgage insurance (one way or another) if you put less than 20% down, but if you find a home you love, a 3% down payment will get you in the door.
FHA requires 3.5% down and allows for thin or weak credit, and VA loans start at zero down. Your situation may dictate waiting, but don’t let your fears stop you from at least consulting with an experienced, competent, ethical mortgage advisor.
How much income do you need to buy a home?
Many financial writers opine that your housing payment should never equal more than 25% of your gross income; others argue 1/3 of your gross income is a good benchmark. That might be good advice for some people, but you can get approved for a prime “A-Paper” mortgage with a total debt-to-income ratio of 45%. Is it wise to do that? It depends on your savings and your income. If you have a nice savings cushion, or if your income is so high that even with 45% of your gross income committed, you’ll still have plenty of disposable income, it’s not nearly as risky as some think. One size does not fit all – you want advice that is tailored to your circumstances and concerns.
You need decent, not perfect credit to buy a home
You do not have to have perfect credit to buy a house. In fact, do you have a bankruptcy from 4 years ago? Not a problem. Do you owe a lot on your credit cards? Not a problem. Do you have heavy student loan debt? We can work with that. The point is, you won’t know unless you have a mortgage expert take a look at your credit report to assess your situation.
In the case of the young couple I was working with, they had perfect credit. They had thin credit, because they were cautious with debt, but perfect credit, and much higher scores than they expected.
So, if you’ve decided that maybe you are ready (financially) to make the leap to homeownership, there’s still the question: Is now a good time to buy a home?
See Also: Are Millennials Buying Homes?
It’s impossible to time the market
The first law of real estate is that it is impossible to time the market. The markets go up and – as we learned in 2008 – they can go down, too. But given enough time, they tend to go up. I have had many clients wait for years for a correction in the real estate market only to watch the price of homes soar out of their reach.
Do some people get lucky? Of course. Those who bought in 2009 through 2011 did very well indeed. Those who bought Apple stock at $10 also did well. But you can’t buy Apple for $10 today, and you aren’t going to get 2009 prices on homes today.
The smarter way to think about buying real estate is to ask yourself why you are buying it. If you are like almost everyone else, you are buying a home because you want a place to live. You want the security of knowing you can’t be evicted, and the joy of making the place your own. And, of course, you know that owning your own home is the surest path to long-term wealth, so you hope to make money. That’s fine.
Just remember that making money in real estate is a long-term proposition. Very few people make millions overnight. (And most of those who claim they did are selling books and DVDs teaching you how to do it. Did you notice that?)
If you can’t time the market, and if owning your own home is a long-term proposition for wealth-building, then the right time to buy is when you are ready – not the market.
Shift from sellers’ market to neutral
Having said that, an interesting thing has happened in the real estate market in the last year. The number of listings in most areas has increased, the number of buyers has remained steady, and multiple offers and bidding wars are becoming less common (if not rare).
We have entered a more balanced, neutral market. This means you don’t have to jump at (or overpay for) a home that doesn’t meet your most important criteria. You can take your time, shop for a home that you will be happy with for a long time, and pay a fair price.
While a well-balanced market tends to not last very long, there is no indication that this market is going to change anytime soon. Home prices will likely stay flat or rise slowly through the rest of this year. You have time to shop, and you’ll have options. We haven’t had these market conditions for a long time, so enjoy them.
Interest rates are low and steady
The prevailing thought among analysts for a long time has been that interest rates are rising and will continue to go up. But a funny thing happened on the way to high interest rates. In January interest rates dropped to levels below all of 2018, and since then they’ve remained pretty steady. Many analysts are now predicting that we will see a recession in late 2019 or early 2020, suggesting that rates are probably going to stay within a small range most of this year.
This means that as you go shopping for a home, your monthly housing payment will be relatively predictable. There’s no guarantee, of course, but the interest rate (and therefore the monthly payment) you are likely to pay should be about the same when you close escrow on your home as it was when you first were prequalified. Predictability is a good thing when it comes to knowing what your home will actually cost.
You are paying rent now and throwing money away
The best argument for buying a home sooner rather than later, however, is whatever you are paying today for rent is money spent that you will never recover. When you stop paying rent and start paying a mortgage, some of your monthly payment goes to principal every month, and you begin enjoying equity growth through appreciation. This is where it is valuable to understand the principle of leverage.
Buying a home is the biggest decision of your life. Well, marriage and kids might be bigger, but you get the idea. It’s an important decision. Consequently, many folks spend a lot of time thinking about it before jumping. Then, when they are finally ready, the market heats up, and they often end up buying a home that isn’t right for them by winning a bidding war and overpaying for it.
Today you don’t have to play the bidding war game, you can choose from a reasonable number of available listings, and your monthly payments will be fairly predictable. It’s the best market for buyers in years.
So, don’t rush out and buy real estate just to buy, but if you come across a home you love, don’t pass it by.
Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
My Blog: www.loanguide.com
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This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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