If your New Year’s resolution is to take the leap and buy a home, you may be in luck. Whether you’re a first-time buyer or considering jumping back in, 2015 offers some encouraging signs after a tough time for the housing market.
Mortgage credit and underwriting requirements are thawing as the economy continues to recover. Government-backed mortgage giants Freddie Mac and Fannie Mae recently rolled out conventional mortgage options with a 3 percent down payment. And average interest rates continue to dip below 4 percent.
With conditions looking good for buyers, here’s a look at four tips to help prospective homeowners follow through on that resolution.
Get your credit in order
After years of tight lending, there are continued signs that mortgage lenders are loosening credit requirements. The average FICO score for a closed loan in 2014 was 726, compared to 738 the year before, according to mortgage software firm Ellie Mae.
Buyers without top-tier credit scores may now have a better chance to secure loans. While benchmark scores for conventional loans hover around 720 or higher, FHA and VA loans usually require about a 620.
While the mortgage market has been volatile, credit-building strategies remain the same. Get free copies of your credit report from AnnualCreditReport.com. Scour them for mistakes, bad accounts or other issues.
Some consumers work to pay down high-interest debt, while others try to build momentum by focusing on smaller accounts. Choose the strategy that best fits your lifestyle and budget.
Low down payments and interest rates are great, but you can’t tap into either without first clearing a lender’s credit-score hurdle.
Build a nest egg
Buying a home comes with a host of potential upfront costs. Even with reduced requirements for down payments, putting 3 percent down on a $150,000 loan means you’re parting with $4,500 on closing day. You may also need money for an earnest money deposit, inspections, appraisals, closing costs and more.
Upfront costs will vary based on a variety of factors, including the lender and the loan type. FHA loans require a 3.5 percent down payment, while qualified veterans and service members can use a VA loan to purchase with no money down.
Be sure to create and stick to a budget that allows you to put some money into savings each month. Having healthy assets puts you in solid position to purchase a home this year and deal with upfront and unexpected costs along the way. It will also make your loan file look that much stronger.
Learn about loans
Get a solid understanding of the mortgage options you might qualify for, along with their benefits and drawbacks.
No down payment or not paying private mortgage insurance are big-time benefits; however, only a small portion of the population is actually eligible for a VA home loan. But you may be able to secure a zero-down loan using the USDA home loan program.
If you can swing a 5 percent down payment but come up short on credit, FHA financing might be an easier path than conventional loans.
Consider the pros and cons of each in the context of your own financial situation and your short-term and long-term homeownership goals.
Loan preapproval is critical in the current home-buying climate. This step involves more paperwork and documentation than prequalification, but it gives buyers a clear sense of their purchasing power and what they can realistically afford. It also shows sellers and listing agents that you’re a serious buyer likely to make good on an offer.
Following these steps can help you on your way to fulfilling your New Year’s resolution and let you head into 2016 as a new homeowner.