4 steps while you wait for the housing market to cool
Although Olivia Dreizen Howell planned to buy a new place for her and her sons after the sale of their house in Long Island, New York, a few weeks of research were enough to tell her that it was not the right time. — at least for her budget.
“With the market being as tight as it is, there’s literally nothing in my price range and ideal location,” says Dreizen Howell. So, she says, she takes a step back – pausing her search and waiting for the right moment to step back. and find your dream home.
She is not alone. With soaring prices, rising mortgage rates and an extreme housing shortage (active listings fell 19% annually last month), many buyers are being sidelined. In fact, according to a recent TD Bank survey, nearly one-third of first-time homebuyers plan to wait until prices drop.
It’s frustrating, sure, but taking a step back can also be a good way for buyers to regroup and strategize for the next time they enter the market. Dreizen Howell, for example, uses downtime to save to put more money aside, which could mean a lower mortgage rate and a smaller monthly payment down the line. It could also help it break into higher prices if needed.
“I know the next time I buy a house, it’s going to be somewhere I want to stay for a long time, so I don’t want to compromise on anything,” says Dreizen Howell, mother of two and founder of Fresh. Starts Registry, a registry website for people going through a divorce. “I’m going to use this time to save even more money so that when the perfect house comes on the market, I can jump on it.”
Are you also falling behind the market due to high prices, tariffs or competition? Experts say there are several ways to use that time wisely and set yourself up for success on the next go-around.
Improve your credit score
Your credit score is a major factor in your ability to not only buy a home, but to do so affordably. Lenders also review your credit report to assess your responsibility for paying off your debts and to assess your overall risk as a borrower.
“Maintaining good credit is one of the most important things you can do when deciding the best time to enter a hot real estate market,” said Steve Kaminski, head of residential lending at TD Bank.
Generally, a better payment history and higher credit scores equate to lower interest rates.
Credit scores range from 300 to 850. According to data from Fannie Mae, a score of 740 or higher qualifies you for the best mortgage rates. But a score 100 points below this threshold? That would mean a rate up to 2.75 percentage points higher, depending on your loan amount. It is the difference between a rate of 5% and a rate as high as 7.75%.
In a market where affordability is shrinking, qualifying for a lower rate can be essential for many buyers waiting in the wings.
“Buyers will want to make sure their credit score is in tip top shape,” says Lindsey Bell, chief market and financial strategist at Ally. “For most types of loans, a credit score of at least 620 is required. The higher the score, the more mortgage options buyers will have, which means varying loan terms and interest rates potentially lower.
If you don’t have a lot of credit history yet, Kaminski says using a credit card to make small, affordable purchases and then pay them off quickly is a great way to boost your credit. “For more experienced borrowers, try to keep credit card balances well within limits and keep track of any other outstanding debt,” he says.
Payment history accounts for 35% of your score, so late payments can cause serious damage. To avoid missing a due date, set your bill payments to autopay when possible.
You should also strive to reduce your debts and avoid taking on new ones, such as opening a new credit card or financing a new car. Both can help you gradually improve your credit score.
You can also take the Dreizen Howell approach and use the time to save – ideally for a larger down payment.
“The amount required for a down payment varies by loan type, but the more a buyer can put down, the better,” says Bell. “Larger down payments will mean lower monthly mortgage payments, better interest rates, lower upfront costs and lower closing costs.”
This deposit should also not come directly from your salary. In fact, Bell suggests “thinking outside the box”.
“In addition to saving slowly, down payment assistance programs and tapping into retirement funds can be considered,” she says. “First-time home buyers can also tap into a traditional IRA — up to $10,000 — without being subject to the additional early distribution tax.”
If you’re not a beginner, you can also tap into a Roth IRA if you have one. Just be sure to avoid risky products like 401(k) loans and consult a financial advisor or accountant if you’re considering withdrawing from a retirement account, as it carries additional risk.
When it comes to down payment assistance programs, a good example is Texas’ Homes for Heroes program. It offers teachers, police officers, first responders, and other government officials in Texas up to a 5% down payment grant. You can check with your state real estate agency or local mortgage professional to find similar options in your market.
In addition to these programs, you can make an effort to reduce costs wherever possible. Dreizen Howell, for example, lives with her parents while her research is on hold, which she says will save her about $2,000 a month.
As Compass Broker Kimberly Jay says, “Don’t waste money on the perfect rental. Find a home that is suitable for as little as possible.
Consider an extended mortgage rate lock
Mortgage rates have risen in recent weeks. Year-to-date, they’ve gone from 3.11% to 5.11%, the difference between a monthly payment of $1,731 and a monthly payment of $2,201 on a listing at the median price right now .
Experts are also largely predicting more rate increases on the horizon. With rising inflation, the Federal Reserve began to tighten monetary policy, which typically results in higher rates on loans and mortgages.
“Interest rates are unlikely to return to historic lows in the near future,” said Dale Baker, president of home loans at KeyBank. “On any day, rates can change, but over the past few months this trend has been up and should hopefully continue at a slower pace overall. Still, cooling off probably still means going up – but not as fast.
Unfortunately, this means that most sidelined buyers will face higher rates when they re-enter the market. That is, unless they lock in their rates now.
A rate lock allows you to reserve an interest rate for a fixed term. The typical rate lock is only 30-60 days, although some lenders offer 90-day rates. The Homepoint building society even offers free “TBD locks”. These allow buyers to lock in a rate – without thinking about a property – and hold it for up to six months.
“We allow borrowers to get pre-approved from us through a mortgage broker in their area and lock in a rate for up to six months without having a specific home in mind,” says Phil Shoemaker, president of fixtures at Homepoint. “It takes the pressure off and gives them more time to find a home that suits them without fear of further rate increases.”
Know your trigger and be ready to act quickly
If you decide to wait, it is essential to understand exactly what would entice you to re-enter the market.
If it’s about having a certain amount of savings, know what that threshold is and consider your bank balance. If it’s lower real estate prices or rates, set a percentage drop that you’ll need to feel comfortable buying.
“Ask yourself how long you’re willing to wait and ‘What if prices go up again?’ “Acting out these scenarios will help set guidelines in place so you can avoid buying emotionally.”
If you’re waiting for a specific type of property or a home in a certain community to come on the market, define what you’re looking for, set up detailed listing alerts, and stay in touch with your agent. And when something comes along that fits the bill? Be prepared to act quickly. Schedule a visit or virtual visit as soon as possible and prepare your mortgage pre-approval.
“Preparation is key,” says Bell. “The goal is to take the steps now that will help improve your chances of buying when you’re ready.”
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