With mortgage rates falling, many renters are now realizing the possibility that owning their own home is within reach.
A total of 30% of all property buyers in September were first-time owners, according to the latest monthly data from the National Association of Realtors (NAR).
And while prices have continued a slow climb, Freddie Mac has reported the average 30-year mortgage rate was 6.35% last month, a significant drop from 6.59% recorded in August.
As an experienced agent, I’m seeing many first homebuyers enter the market with a down payment of around 5% – that’s the equivalent of $10,000 for an entry-level home currently.
Many surveys suggest the most common myth among first-time buyers is the need for a 20% down payment. Let me correct anyone who still thinks this is a compulsory hurdle to jump.
If you have less than 20%, however, your lender will insist that you take on Private Mortgage Insurance, which protects them from the risk that you might default.
It’s not a cheap policy, but payments stop once you have 20% equity in your home.
Here are some ideas for aspiring homeowners as mortgage rates dip and their borrowing power rises:
Create your vision – Focus on the location and style of home you’re seeking. Obviously, keep it within the realms of your financial capacity. Create a list of “must-have” and “nice-to-have” features that will make your search so much easier.
Build a budget – Assess your financial situation and focus on your ability to service a 30-year mortgage. Consult a mortgage broker or a bank’s lending officer to help you build a realistic picture of your spending power.
Save first – Some of us need discipline to save for anything! Set up a savings account and make sure it’s the first payment made every time your paycheck comes in. Just let the cash accumulate. Zillow says this strategy is adopted by 72% of first homebuyers.
Free cash – Seek out all the federal, state and local government grants, schemes and incentives available to first homebuyers. Across America, there are more than 2,000 such schemes. They’ll help you get into your first home faster than you thought possible. Check out the Down Payment Resource Center.
Small sacrifices – Watch your spending habits. Consider moving into a smaller rental, or even return to the family home while you save for a down payment. Even small savings, such as making your own lunch at work, add up.
Reduce debt – Your credit score is an important factor when a lender considers your loan application. So, cut down your so-called Debt-to-Income (DTI) ratio. This will maximize the amount of money a lender will allow you to borrow.
Side hustle – It’s amazing how another part-time job can accelerate your savings plan. Don’t make your life a misery with too much work, but consider this strategy a temporary means to an end.
Gift fund – This is a little unusual but becoming more common. Couples when getting married ask for contributions to their down payment rather than a wedding present. Some 20% of couples make this request, according to a survey by the website The Knot.