Article was written by Ryan Van Soelen, an expert mortgage loan officer.
Raise your hand if you’re excited (and maybe a bit relieved) that spring has finally arrived! That two month stretch from mid-January through Mid-March seemed more like six months, and worse yet, it seemed like the snow was never going to stop. However, nevertheless, we made it through another Iowa winter. The snow has melted, the grass is turning green, and our beloved tulips are starting to peek through the soil. The cold not only affected peoples’ moods and created exorbitant amounts of cabin fever, but it also drastically slowed the local housing market. However, now that temperatures are starting to touch the upper 50s and 60s the housing activity has picked back up, so to make sure you don’t miss out on buying your first home or your dream home Leighton State Bank is here to help.
If you’re considering purchasing or refinancing a home within the next few months, this coming year, or even a few years down the road I want to help put you in the best possible position to accomplish that goal. While rates may have climbed slightly during winter, they have drastically declined over the last four weeks making now a great time to purchase a home. According to an article on MSN home values in the state of Iowa are expected to slightly decline by about 0.5% in 2019, which is great news for potential buyers (Olya, 2018). However, marginally lower housing prices may not be enough to allow you to purchase that house you love. Instead, I am going to lay out three areas (income/expenses, saving, credit) you should consider and plan for this spring season to be in a prime position to become a homeowner.
First, it’s crucial to review your income and expenses by way of creating a budget. I know, the dreaded “B” word is never one that people like to hear, but the reality is that a budget will be very helpful in understanding what you will be able to afford for a mortgage payment. Purchasing a home is a big step for most people, and it comes with lots of additional responsibilities, but the most important responsibility is ensuring that you can afford your new house. By identifying the areas you currently spend your money on you should be able to adequately understand which expenses are necessary and which areas may be opportunities to cut spending if you’d prefer to devote more income to a house payment. Not only will creating a budget allow you to re-examine your current expenditures, but it will also allow you to have a more accurate idea of the total house payment you would feel comfortable with. Here are a few tips from our Homebuying 101 class for creating a successful budget:
- Talk with your significant other/other members of your family (So they’re aware of your plans and can keep you accountable)
- Be specific (having similar goals to your significant other is key)
- Set realistic goals and objectives
- Exercise willpower
- Develop a good record-keeping system
After you’ve created a solid budget and have identified areas you may be able to cut down on spending, the next crucial phase to consider is saving money for both a down payment and closing costs. Mortgage options exist for those borrowers that have low to no down payment, but having some funds saved is always a great idea. Typically, the more money you have available to put towards a down payment, the higher a price you will be able to afford, but more importantly, you will end up paying much less interest over the life of that loan.
Another reason to save funds for a down payment is that you’ll be able to avoid private mortgage insurance (with 20% down) or cancel that PMI sooner than if you’d put 0% down. And the last reason to make sure you have some money saved is that every mortgage loan will have costs that a borrower must cover when the loan is ready to close. Sometimes those fees can be financed into the loan, but for most purchase loans you will need to cover those fees on your own. Just remember that you will need to keep all funds for down payment and closing costs in a verifiable account (checking/savings accounts, investment accounts, etc.) and if at all possible, try to avoid those large cash deposits (generally defined as >$1,000) within two months of applying for a mortgage.
The third and typically most important, area to work on for the months leading up to your new mortgage loan application is your credit. Understanding and building good credit may seem like a difficult and sometimes confusing task, but here are some simple tips you can follow to ensure that your pre-approval request is approved with no (or maybe just minimal) questions asked. In order to establish good credit history you’ll want to do the following: 1) Apply for credit gradually (applying for a small limit credit card or a secured credit card is a great way to start your credit history), 2) Don’t apply for more credit than you can manage, and 3) Make all regular payments to credit accounts on time. Following these three simple steps will give you a great start to building that excellent credit history that all banks and mortgage lenders look for. After you’ve started building your credit it’s wise to better understand how your score can continue to improve. All credit scores are made up of five different components, which carry different levels of importance, so here are the five factors that determine your score (“What’s in My FICO® Scores”) and the weight each one carries:
- Payment History (35%) – Making your payment on time is one of the easiest ways to bump that score up
- Amount Owed (30%) – Rather than maxing out credit limits on credit cards, your score can actually improve by maintaining a balance around 20% of your credit limit or less
- Length of History (15%) – This factor obviously takes more time to develop, but a longer history of responsible credit usage will lead to a higher score
- New Credit (10%) – Opening multiple new credit accounts in a short period of time may potentially lower your credit score
- Types of Credit Used (10%) – Having a variety of credit accounts (credit cards, mortgage, car loan, student loan, etc.) can improve your score
I hope you found these three tips for purchasing a new home or refinancing to be helpful. The reality is, however, that no matter the amount of time you may spend researching or preparing for this process, you will likely still have questions. That’s where I come in. I am always willing to answer questions and explain as much or as little of the process as you may need. I have thoroughly enjoyed helping each and every customer that has allowed me the opportunity to assist them in accomplishing such a large milestone, and I would love to do the same for you. Enjoy the beauty of spring and all the new beginnings that may come with it. Happy house hunting!