Buying a house is an exciting endeavor for many people; however, there are plenty of obstacles to overcome before you can close on a property and make it yours. With the cost of homes, you may be thinking that buying a home is not an option. You may have been told that it takes a 20% down payment to buy a house. You may be waiting for the market to ‘cool’ before buying. We’ll cover each of these areas in this article. So you can make wise money moves and not lose out on building wealth when considering your first time home buyer loan.
The first obstacle that prospective homeowners often encounter is not feeling ready. Many first-time homebuyers delay buying a home or experience apprehensiveness. The most common concerns are about:
You are not alone if you feel this way. Feeling not ready is quite common and keeps many people from buying a home or waiting longer than they really need to. Something to consider if you are feeling stuck or not ready is that when you rent, you are already paying for a mortgage, just someone else’s.
Overcome the readiness worries by getting a free, no-obligation consult with a lending expert. A quick consult with a lending expert will help you see immediately if you qualify or if there is an area to work on. A lending expert will look at some high-level numbers (income, debts, credit score, etc.) and let you know if you have a good financial picture to move forward in the loan process.
You don’t need a 20% down payment to buy a home. Conventional loans start as low as 3% down. FHA loans start at 3.5%, and if you are a veteran (or veteran spouse), you can get a VA loan at 0% down payment.
So, where did the 20% myth come from? In the 1980s, interest rates were very high (peaking at 16-18% in 1981). Back then, it was wise and often necessary to have a 20% downpayment to make the monthly payment affordable. Over the years, interest rates have fallen significantly, changing the lending picture for the average home buyer.
Most home buyers will not need 20% down to get a monthly payment that is affordable. The only caveat to be aware of is that you will pay for monthly mortgage insurance until you reach 20% LTV (loan to value). With home values increasing rapidly in most markets, many homeowners are able to reach that 20% very quickly and drop the mortgage insurance as soon as they do.
The 20% downpayment myth is often perpetuated by advice we hear from our parents or the generation above us. While that may have been true decades ago, when the interest rates were much higher, it is not true today. Don’t let this myth hold you back from entering the property ladder.
The market is hot. You may even hear, “this is a seller’s market.” If it feels like an intimidating time to buy a home, it is. But it doesn’t mean it’s not the right time to buy. And waiting could actually cost you more money in the long run. Ensure you don’t wait so long that you get 1. Priced out of the market or 2. Wait for something that is not likely to happen. Read on as we provide more context around this topic.
Many folks continue renting, thinking that there is a bubble and it will burst, and when the home prices drop, they will pounce and buy something. Perhaps you remember the market crash of 2008 and think that the market will drop again as it did back then. Google this topic and see that, for the most part, financial experts don’t feel that we are in a bubble. In the early 2000s, there were many contributing factors driving the bubble and its subsequent bursting. Things like sub-prime lending, ARM loans that depended on continual property appreciation, and an unregulated market all created the perfect storm.
Today’s hot market and forecasted growth are not being driven by any shady or unstable factors. Rather, it’s demand + a lack of inventory + a few years of excellent interest rates. These are healthy driving factors. Nothing in this mix is a red flag for a bubble that will burst. There is no way to increase the inventory quickly, and thus the market will continue to be “hot.” As long as loan rates stay reasonably low, there will be a continued demand for home buying. Waiting for the market to ease may cost you your opportunity to purchase a home.
Below is an example scenario. First, we’ll review the costs and equity if you buy a home now. Then, we’ll review the costs and equity at year 5 if you wait to buy when you have saved for a larger down payment. We’ve used a conservative home appreciation of 3.8%. Some markets, such as Denver, CO are much higher. Managing Broker, Nathan Jennison, walks through the numbers. Watch now or get started with a New Home Buyer Checklist.