Wondering how to afford a home in this market?
If you’ve spent the past few years saving up to buy your first home, then actively looking through smatterings of available listings before they get snatched up — likely above the asking price — you’re not alone.
Mortgage rates dropped and sent the housing market into a frenzy. A lack of supply and sky-high demand caused property values to grow at a historical pace. And today, inventory is still incredibly low while interest rates have shot up. This combination of factors has eroded affordability in an already difficult market for buyers.
But you’re not out of options, and there are things you can do to improve your odds in the home buying game. Mortgage expert Shivani Peterson shared three strategies in a recent episode of The Mortgage Reports Podcast. Here’s what she had to say.
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Three expert tips for first-time home buyers
Now more than ever, it’s important to set yourself up for success when you’re buying a home. Having a clear picture of your own finances and a realistic budget is key, so you know what you can bid and are able to move fast on a home you want.
To that end, here are three tips Peterson gave to help first-time home buyers in the current market:
1. Update your preapproval at today’s rates
If you’ve already been preapproved for a mortgage, make sure to have your lender update your preapproval letter based on today’s interest rates.
This will help you get a more accurate picture of how much house you can afford and what your monthly mortgage payments will look like if interest rates have risen. It will also make the lending process quicker and more seamless than it would be if you had to get re-approved.
Remember that most sellers won’t even consider an offer unless the buyer is pre-approved at the right price point. Sellers and their agents want to know you’re ready and able to finance your offer amount. So you’ll want to have your preapproval teed up as soon as you’re serious about bidding on a home you like.
2. Be smart in negotiations
Normally, if you think a property you like is being listed too high, you’d offer the seller a lower price. However, instead of a price reduction, it could be more prudent (and possibly even more likely that a seller agrees) if you ask for closing cost credit.
“The seller’s not going to be stoked about giving up $15,000. They might be more amicable about giving you a $5,000 credit toward your closing costs.”
The credit can even be used to buy points as a way to reduce your mortgage rate. “The seller’s not going to be stoked about giving up $15,000. They might be more amicable about giving you a $5,000 credit toward your closing costs,” Peterson said. “In turn, you use that credit to buy down your interest rate.”
Doing the mortgage point buy-down would lower your monthly payment. Peterson explains that over the lifetime of the loan, you could save way more than the initial $15,000 in her example above.
3. Look into all loan types
A conventional, 30-year fixed-rate loan is the most popular type of mortgage — but it’s just one of many home loan programs available to borrowers.
In today’s market, adjustable-rate mortgages (ARMs) are rapidly rising in popularity due to their low interest rates. With this type of loan, you can often get a substantially lower rate than a 30-year fixed loan — at least at the outset. But your rate and payment have the potential to change over time.
“If your parents told you about ARMs, they probably told you horrible things that give you nightmares … but these are not the same scary ARMs that were used prior to the Great Recession.”
It can be unsettling to not know where your interest rate might go. However, during times of rising rates (like now), ARMs can be a way to get below-market pricing.
“If your parents told you about ARMs, they probably told you horrible things that give you nightmares … but these are not the same scary ARMs that were used prior to the Great Recession,” Peterson said. Today’s ARMs come with special caps and regulations that limit the amount your mortgage payment can increase over time. And with their low intro rates, ARMs can often help buyers afford higher-priced homes than they would with fixed-rate financing.
Of course, this loan type isn’t for everyone. But it’s worth considering if higher rates have put your home buying plans in a bind. If you’re curious about ARM loans, talk to your loan officer about how they work and whether an adjustable rate might be the right choice for you.
The bottom line for first-time home buyers
While it’s certainly a tough time for house hunters, there are helpful strategies to deploy when financing your first home.
The handful that Peterson outlines could save you a lot of money when you are able to buy a property — even now, with affordability so strained.
“I would [also] look at all your monthly debts and see how they’re impacting your cash flow and buying power,” Peterson concludes. Remember that home buying impacts your full financial picture and making even small improvements can help your chances.
In other words, there are always levers to pull and tricks to use to give borrowers a leg up, despite difficult buying conditions.