If you’ve been saving for a first home but have been sitting on the sidelines because of high interest rates, get ready: It’s just about “go” time.
In case you haven’t heard, the Federal Reserve recently let slip that it will likely cut interest rates in September. Just the mere idea of a long-awaited rate cut caused mortgage rates to take an anticipatory dip to 6.35% for a 30-year fixed mortgage for two weeks straight.
Rates could go even lower, with the Realtor.com® midyear forecast predicting that rates will fall to 6.3% by the end of 2024.
As interest rates drop, more people might be lured into the market, which could drive home prices up. In other words, if you’ve been hoping to buy a home, now may be the time.
“First-time homebuyers can start preparing for the housing market by getting to know their budget and preferences and becoming familiar with the housing market in the area they hope to buy,” says Realtor.com senior economic research analyst Hannah Jones. “Understanding what is available and how it matches your ideal budget is important to set realistic expectations.”
For reference, the typical starter home (which Realtor.com defines as 0-2 bedrooms) had a median list price of $323,000 in July 2024 and comprised 22% of all available U.S. housing inventory.
With that in mind, here are some things that wannabe first-time homebuyers should start doing right now.
Get to know your starter home budget
Budget is a multifaceted term when it comes to buying a first home.
First, it’s essential to know that nearly all residential mortgages are based on a standard rule called the debt-to-income ratio, or DTI. A person’s DTI is determined by dividing monthly debt payments by monthly gross income, and that ratio is used to help evaluate your ability to repay a mortgage.
“Mortgage programs often are structured with two ratios—one for the housing payment and one for total debts,” says Anna DeSimone, former CEO of Bankers Advisory and author of “Closing the Gap in Homeownership.” “Generally, the housing payment cannot exceed 30% of your total monthly income. However, this ratio can be stretched if you have little or no debt.”
Most lenders want mortgage applicants to have no more than a 43% DTI, though some will accept up to 50%. In general, the lower your DTI, the better your chances of getting a higher mortgage. So if you want to buy a first home, try to get your debts down first.
Next, know what you need to cover your monthly expenses.
“Begin by discussing your desired monthly payment with your lender rather than focusing solely on the amount for which you are pre-approved,” says real estate agent Michael Crute, co-founder of Welcome Home Atlanta. “Many homebuyers make the error of basing their purchase on the pre-approval amount instead of tailoring it to fit their budget and short-term and long-term objectives.”
Crute suggests that first-time homebuyers be mindful of additional costs such as moving expenses, interior and exterior improvements, furniture, utilities, homeowners association fees, prepaid expenses, and unforeseen repairs to avoid overextending themselves.
Snag the lowest mortgage rate possible
Even with interest rates on the decline, it’s good to know how to secure the best possible rate for your financial situation.
“When shopping for a mortgage, keep in mind that ‘one price does not fit all,’ and your options might vary based on your credit score and cash available to cover the down payment and closing costs,” says DeSimone. She adds that homebuyers should check their credit report a month or two before they hope to buy a home or meet with a lender.
Everyone can obtain a free copy of their credit report yearly by law. The Consumer Financial Protection Bureau recommends annualcreditreport.com to obtain your free report.
“Look over your report to see if there are any errors on your name(s), current or previous addresses, and the reported credit information,” says DeSimone.
The site also answers many questions and guides you in reporting errors on your report.
“Your report may not be updated with corrected information for several months,” says DeSimone. “When you meet with your lender, explain that you have contacted the credit agencies and mitigation is pending.”
Crute also encourages homebuyers to ask about incentives offered by builders, such as permanent buy-downs on interest rates, which can significantly enhance the affordability of new-construction homes. Additionally, consider using seller concessions to buy down a point on your mortgage rate, though evaluating the financial benefit of such actions based on current market conditions is important.
Explore financial incentives available to first-time homebuyers
There are several programs meant to assist first-time homebuyers, so start looking into these ahead of time. That way you’ll know what assistance might be available to help you qualify for a starter home before interest rates fall.
“Whether you are applying with a community bank, credit union, or mortgage lender, remember that most lenders are dealing with government agencies such as Fannie Mae and Freddie Mac,” says DeSimone. “Eligibility requirements are basically the same due to the universal underwriting standards, so look at the whole package and ask lenders if they are offering down payment assistance or other incentives for first-time homebuyers.”
Research local housing authorities in your area and search for their homeownership programs, says Crute. But be prepared to meet specific eligibility criteria, such as income limits or buying in designated areas.
Many municipalities, states, and federal agencies also offer programs designed to reduce the cost and burden of homeownership, particularly for first-time buyers. Check with your local banks, as they are often mandated by the Community Reinvestment Act to support economic growth, homeownership, and development within their communities.
CRA programs offer “special loan products, grants, lower interest rates, or down payment assistance tailored to first-time homebuyers,” says Crute.
Familiarize yourself with the housing market
It pays to know the area where you want to live so you can nail down your budget.
A good way to start is by using the Realtor.com home search function to find listings in the cities or towns where you want to buy.
“As an initial step, keep your preferences open so that you can view more homes in a broad price range, such as $300,000 to $400,000,” says DeSimone. “The more homes you view, the better you can define ‘value,’ which requires comparison shopping.”
Homebuyers should take time to read all of the property details, noting the square footage, lot size, type of heating, and cooking fuel, DeSimone suggests. Also, look at all the interior and exterior photos and use the mapping features to explore the area in “street” or “satellite modes.”
After your preliminary research, you can narrow your preferences and take a closer look at specific homes—noting how long they’ve been on the market. Be sure to note the property taxes and applicable HOA dues. As a final step, take a look at “recently sold” homes to see what the final prices were so you have a ballpark range of going rates.
“Your diligent research will be worthwhile, and you will be well prepared to start house hunting with a buyer’s agent,” says DeSimone.
Figure out your timing
Even if interest rates suddenly drop, you shouldn’t panic and think you have to make an offer on something immediately, lest you miss out. Ultimately, many variables go into purchasing a home, and locking down the right interest rate is only one of them. The best time to buy a starter home is when you’re ready.
However, if rates reach the “more reasonable” zone, and you’ve planned ahead, this may be your moment.
“Historically, the fourth quarter presents a prime opportunity for savvy buyers aiming to purchase a home,” says Crute.
Sellers active during the holiday season are typically highly motivated to close deals, and leveraging this period can lead to successful acquisitions at potentially reduced prices.
This post was originally published on www.realtor.com
