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.