Would-be homebuyers eyeing 2016 as the year have a fair bit working in their favor. Mortgage credit continues to thaw, interest rates remain surprisingly flat and more homes are expected to hit the market as Spring approaches.
To be sure, some buyers have a more streamlined path than others. Macro-level outlooks are one thing; it’s another to build the credit and finances necessary to lock down a home loan in the current lending environment.
Whether you’re a first-time explorer or a long-term dreamer, here are six tips to help you make the leap and take advantage of a promising housing market in 2016.
1. Tackle Your Credit Now
Credit looks to be loosening as we head into the Spring homebuying season. Through the first six months of 2015, the average FICO credit score for all closed loans was 730, but that decreased to a 722 FICO score by the end of the year, according to mortgage software firm Ellie Mae.
Still, building the strongest credit profile possible can save you money when it comes to things like interest rates and private mortgage insurance.
To improve your credit, you can get copies of your free annual credit reports each year from AnnualCreditReport.com. Review them carefully for errors or problems that might be dragging down your scores. (You can find more about how to dispute errors on your credit reports here.) Pay your bills on time and strive to keep your credit card balances under at least 30% and ideally 10% of your credit limit. You can track your progress by viewing your two free credit scores each month on Credit.com.
2. Explore Your Options
Homebuying education is key. Studies and surveys consistently show that buyers overestimate their mortgage knowledge or figure their lack of it doesn’t matter. The reality is ill-prepared buyers can wind up in bad loans or simply miss out on maximizing their budget and options.
Take time to learn about the major mortgage types, the upfront costs of homebuying and what might make the most sense given your unique credit and financial situation.
VA loans are arguably the most powerful loan on the market, but they’re not a great fit for every veteran. Federal Housing Administration loans allow for low down payments, but carry costly mortgage insurance. Conventional loans feature tougher credit benchmarks, but come with down payments as low as 3%.
3. Pre-Approval Is a Must
Shopping for homes is the fun part. But it’s way more fun, not to mention useful, to shop for homes you can realistically afford. Work on getting loan pre-approval before starting your home search.
A pre-approval letter shows sellers and real estate agents you’re a serious homebuying candidate. In fact, some agents won’t accept purchase offers without one. Pre-approval also gives you a clear sense of how much home you can buy.
But remember the prefix is there for a reason — loan pre-approval does not guarantee you’ll get a home loan. It’s a big step in the right direction that comes with conditions and contingencies.
4. Know Your Market
Bidding wars are breaking out in communities where housing inventory struggles to keep pace with demand. About a third of homes sold for or above their list price in October 2015, according to CoreLogic.
The likelihood of rising mortgage rates in 2016 may push even more buyers into the game. Look for seasoned real estate agents who really know your market and how to navigate a bidding war if need be. Coming in with a strong offer at the outset can be crucial for buyers competing in hotter real estate markets.
5. Be Patient
Getting to the closing table might take a little longer than normal this year, so plan accordingly. The average purchase loan closed in 50 days in December, eight days longer than the December prior, according to Ellie Mae.
Many mortgage industry professionals point to recent disclosure and documentation changes as the culprit. But those hiccups and delays may subside as lenders, title companies and other industry players better adjust to the new regulations.
A longer closing window can affect everything from purchase contracts and interest rate locks to closing costs and coordinating your move.
6. Avoid Costly Detours
It’s a good idea to keep a tight lid on your credit and finances once you’ve decided to pursue a home purchase. Taking on new credit, changing jobs and even moving money around accounts can raise a red flag with lenders and, in some cases, derail your loan.
Change isn’t your friend during the homebuying journey. It’s not enough to get your credit and finances in order before starting the process – work hard to keep them that way as you move toward closing day.
More on Mortgages & Homebuying:
- Why You Should Check Your Credit Before Buying a Home
- How to Find & Choose a Mortgage Lender
- How to Refinance Your Home Loan With Bad Credit