Submitted by Chris Campbell, WaFd Bank Southern Washington Division Manager.
I love this part. I’m about to talk with you about the dream of homeownership. With information and perseverance, you can make it reality.
A few key points to remember before we jump in: Be patient. Finding the right home and loan program can take time. Be resilient. The real estate market in Puget Sound can be competitive. It’s not uncommon to not get the first house you try for. Be disciplined. You may need to adjust your budget, work on your credit, increase savings or all three. Get preapproved by a lender. It makes home shopping easier when you know your budget and monthly payment targets. The preapproval process can also uncover any obstacles that must be overcome. Knowledge is power. And finally, don’t lose sight of the goal and work with professionals who listen to your needs and can help navigate your unique circumstance. Ready Puget Sound? Let’s go.
If you read the headlines around housing or peruse a homebuying website like Zillow, there are signs that the housing market is about to open back up.
Interest rates are expected to go down this year, more houses are being put on the market and more housing is being built.
If you think you might want to take advantage of the thawing of the housing market, then there are a few things you should be thinking about to prepare. Think of it as homebuyer homework, except instead of a graded test at the end, you could get keys to your new home.
Buying a house can feel overwhelming, but your local bank loan officer is here to help. Think of them as a free homebuyer tutor, helping prepare you for all the quirks involved and arm you with information so you are ready to buy when the time is right. The four main areas of homework to focus on are budgeting, preparing for additional costs, getting your credit score up, and learning about programs designed to help you.
Budgeting
You’ve probably heard the comment that cutting out avocado toast and your daily latte will save you money, but let’s be real; that WILL NOT make it so you can suddenly afford to buy a house. That being said, budgeting your money will help. Making a budget for your monthly income and spending goes a long way toward figuring out what you can afford and seeing where you can cut costs and save more.
Generally, you’ll need at least 3% to 5% of the cost of the home for a down payment, so once you find the price range of the house you want, you can set up your budget to save enough for a down payment over time. Buying a home is probably the most expensive thing you’re going to buy and there are a lot of costs that can add to the final price, but by sticking to a budget you can set a solid foundation so you’re ready to strike when interest rates drop and your dream home comes on the market.
Don’t forget to think about additional expenses
- Inspection and appraisal fees: These are usually one-time fees when you buy a house. In a slow market, sometimes the seller will pay these fees. Appraisal charges can change depending on the size and location of the house, but generally run about $ 500-1050. Home inspection fees run from $200-$400 or more.
- Homeowner taxes: Property taxes change by location, but generally go to parks, schools, and sidewalks in your local area. To find out how much property taxes cost for your future house you can go to the county tax assessor’s website and look up the property by address, ask for the seller’s current annual tax on the property, or use websites like Zillow which list known tax amounts.
- Home association fees: An HOA is designed to keep up the look and feel of a neighborhood and can include things like community centers, pools, sports courts, and more. HOAs can cost as little as $30 a month all the way up to hundreds a month. Doing research on HOAs in the area you want to buy is a must for any homebuyer as it can add a lot of money to your monthly bill.
- Maintenance costs: The downside to renting is those noisy upstairs neighbors, but the upside is having a landlord who fixes things that break. When you own your home, you are the one who pays for all maintenance, including replacing appliances. Creating space in your budget to save for emergencies will go a long way toward making these surprise costs less of a burden.
- Insurance: Almost all lenders require borrowers to have insurance on their home. The type of insurance varies based on where you live. If you’re in an area where it’s normal to have natural disasters like earthquakes or floods or hurricanes, then you probably need supplemental insurance. A recent study says the average cost per year is $1,516. If you put less than a 20% down payment there is also Private Mortgage Insurance (PMI) which many lenders require to be paid on the loan, depending on the amount of your home loan compared to its value, also known as loan-to-value. The PMI you pay is retained by the bank every month and does not apply to the principle on the loan (the original amount you borrowed). Not all banks charge for PMI, so shopping around is a good idea.
Get your credit score up
To qualify for a loan and get the best rates, you need a solid credit score. The higher your score, the better your loan rate. Raising your credit score takes time, which is why it’s a great idea to start working on it well ahead of when you plan to buy a home.
- Review your credit report: There are three main credit reporting agencies – Equifax, Experian and TransUnion. Federal law requires credit reporting agencies to provide your credit report to you every 12 months for free if you ask. To order your free credit report, visit www.annualcreditreport.com.
- Pay your bills on time: Around one third of your credit score is based on whether you pay your bills on time, every time.
- Don’t use too much credit: One third of your credit score is based on credit utilization, which is basically how much credit you have available compared to how much you use. So, if you have a $10,000 credit limit on your credit card and have $2,000 in charges, your credit utilization is 20%. You want to keep this percentage as low as possible.
- Make sure you have a credit card: Using a credit card responsibly can improve your credit score and helps to build good payment history. The biggest mistake people make is spending more money than they have and not making payments on time.
- Limit the number of credit inquiries: When you apply for a new loan or credit card, the lender pulls your credit report and, over time, these inquiries may lower your credit score. If you plan to buy a house, then cutting down on requesting other loans is a good idea, including auto loans and credit cards.
Learn about programs designed to help
An affordable home is the gateway to long-term and short-term financial success. Long-term, you’ll build equity you can use in the future. In the short-term, you’ll be able to enjoy potential tax deductions (consult your tax advisor) and pay yourself instead of paying rent. Homeownership can seem more challenging for low to moderate income families. However, there are many programs designed to help make home ownership a reality. One program WaFd Bank offers is the Smart Start and Smart Start Boost Home Loan Program.
- If you qualify for the Smart Start Boost, your down payment could be as low as 1%*
- No private mortgage insurance (PMI) required*
- Gift funds, seller contributions and down payment assistance program funds allowed
No matter which program you choose to use, they are all beneficial and can help get you into your new forever home.
Member FDIC. Equal Housing Lender. All loans subject to credit approval, additional terms and conditions may apply.
* Smart Start Boost is only available with the Smart Start Mortgage. Minimum down payment for the Smart Start Mortgage is 3% of the purchase price. Smart Start Boost funds may be used to reduce the 3% down payment to 1% of the purchase price, reduce your closing costs or to buy down your interest rate. Restrictions apply. Ask your loan officer for additional details and qualifications.
