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Fall 2021 Home Buying Guide

After more than a year of red hot home sales, the housing market is finally showing signs of a cool down. Late summer has brought more new inventory, flattening list prices and fewer bidding wars, all pointing to a less hectic fall buying season.

Typically home sales slow and prices drop in the fall. That didn’t happen in 2020, but there are signs of a return to more typical seasonality this year.

“If you were shopping earlier this year and got fed up with the competitiveness, now may be a good time to start looking again,” says Ali Wolf, chief economist at home building consultancy Zonda.

Pricing has calmed a bit. The national median list price decreased to $380,000 in August, from the high of $385,000 in July. Although asking prices were still 8.6% higher than a year ago, the year-over-year rate of growth slowed from 10.3% the previous month.

More telling, 17.3% of all listed homes saw price reductions last month, a signal sellers are needing to adjust their expectations to attract buyers. In February, just 9% of listed homes saw price reductions, the lowest share this year.

It helped that a total of 432,000 new listings hit the market in August, a 4.3% increase from August 2020, according to Realtor.com. What’s more, many of the homes becoming available for sale are smaller, more affordable starter homes, bringing more options to first-time home buyers.

While this is all good news for buyers, it’s still a seller’s market. The total number of active listings at the end of August was just 650,000 units. There’s still a long way to go before the market goes completely back to “normal,” notes Wolf.

The key is being able to take advantage of an opportunity when it comes along this fall. Here’s how.

Check your credit report for errors

If you are buying a home you probably need a mortgage, which means lenders are going to check your credit report and score.

Checking to make sure there aren’t any mistakes on your credit report that could affect your chances qualifying is an important first step. “In most cases, it is something small, but sometimes it’s huge,” says Kroger Menzer, a realtor with Coldwell Banker in South Jordan, Utah, who used to work for a mortgage lender.

Menzer knows from experience, as he found he was listed as dead on his credit report. “Turns out nobody will lend you money when you’re dead,” he says.

You can request a free copy of your credit report from any one of the three major reporting bureaus — Experian, Transunion and Equifax — from annualcreditreport.com. You can access a free report every week through April 2022. (Normally, you’re allowed one free report per bureau per year.)

If your credit score is low for legitimate reasons, such as high balances on your credit cards or because you don’t have a long credit history, you can take steps to improve your score. Paying down outstanding debt, keeping your credit utilization rate low and making on-time payments can bring your score up. If you have serious credit problems, such as a history of late payments or loan defaults, a credit repair company may be able to help you to bring your score up.

Most mortgage lenders will require a credit score of at least 620. However, to get the most favorable mortgage rates you’ll want a credit score of 740 or higher. The average credit score for purchase loans originated in August was 730, according to mortgage data firm Black Knight.

Set a budget

How much house can you afford? There are a few ways to figure it out.

In general, mortgage lenders will use the 28/36 rule. This rule of thumb says that you should spend no more than 28% of your gross monthly income on housing costs and a maximum of 36% of your gross income on paying debts, including the mortgage. Some lenders, however, will allow for a maximum of up to 43% of gross income going toward debts.

Of course, you don’t need to borrow as much as you qualify for. Once you have a target monthly payment, you can use a mortgage calculator to get a sense of how large a mortgage fits your budget.

You’ll also need to know how much you can put toward a down payment. In order to avoid paying for mortgage insurance (which protects the lender, not you) you’ll generally need to put down 20%. However most borrowers put down less and FHA loans only require 3.5% down in most cases, while USDA and VA loans (for active-duty military and veterans who qualify) can be taken out with no money down.

Shop for a mortgage lender and get pre-approved

Mortgage rates are near historic lows. Borrowers with excellent credit can currently get a 30-year fixed-rate loan with a rate of 2.88%, on average. The rate you qualify for will depend on your credit score, loan size and how large of a down payment you bring to the table.

Don’t assume that the interest rate offered by one lender will be the same rate you’ll get from every other lender. Qualification criteria vary, so you won’t know what the best rate you can get is until you check with different lenders.

Pull rates from at least three different lenders. Shopping around for the best rate could save big money over the life of the loan. Borrowers who get one additional quote save an average of $1,500 over the life of the mortgage, but by getting five quotes you save an average of $3,000, according to Freddie Mac.

Once you find the right lender, get a mortgage pre-approval letter. This will make the mortgage application process smoother and also tells home sellers that you are a serious buyer and likely to be able to close in a timely fashion.

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Be realistic about future home values

Don’t assume home values will automatically continue to increase.

A home purchase is a long term investment. Traditionally, homes tend to appreciate around 3.5% per year. While the COVID-19 pandemic has led to double-digit home price growth over the past year, price growth is likely to settle down in the future.

Home prices are influenced by a variety of factors, including the economy. Look no further than the Great Recession to see how a booming housing market turned into a market crash. Home values dropped by 18% in December 2008 alone, according to Case-Shiller. Values in some cities fell by as much as 30%.

Natural disasters that cause significant damage, such as hurricanes or the wild fires that have engulfed the West coast, can influence home values as well. Areas with a high risk of natural disasters see 5% lower price growth than homes in areas with a lower risk, according to Realtor.com.

“Buy something you like, buy something you feel good staying in, buy in an area you feel good about,” Menzer says.

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Source: on 2021-09-21 08:56:15

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