7 Strategies for First-time Homebuyers in 2024

7 Strategies for First-time Homebuyers in 2024

Here’s the tough news: so far, the housing market remains tight in 2024 with elevated home prices and mortgage interest rates, low home inventory, and inflation’s persistent strain on budgets. These conditions make it difficult for anyone purchasing a home, especially first-time homebuyers.

Here’s our optimistic view: if you’re currently in the market for your first home, chin up! By following these strategies, your dream of homeownership may be possible and easier and more affordable than you imagined.

1.       Fine-tune Your Finances
Review your budget. Once you’ve done that, and determined how much you can afford, and possibly even taken the steps to get prequalified for a loan, you can still fine-tune your finances to make homeownership easier on your wallet, especially if you have no time constraints to buy:

Increase Your Credit Score to Potentially Receive a Lower Rate
Your credit score plays a major role in your mortgage rate. A credit score is a three-digit number that tells a lender how likely you are to pay your agreed-upon credit obligations. It is based on factors related to your financial history, including how much debt you owe, how much credit is available to you, and your history of paying off past debt. A good credit score (690+) or an excellent credit score (750+) could help you receive a lower rate on your loan, which is crucial in the current high-interest-rate environment. A lower interest rate could mean lower monthly payments. If your credit history has room for improvement, it might be worth your while to improve your credit score before purchasing a home.

Save for a Larger Down Payment
Generally speaking, the larger the down payment you put toward your home purchase, the better. Money down is applied the total cost of your home, so a larger down payment reduces the amount being financed. That lowers your monthly payments and the total interest you pay over the life of the loan. More winning!

In addition, mortgage insurance is often waived for buyers who put down 20% or more of the purchase price on a conventional loan. Mortgage insurance is added to your monthly payment and therefore increases the monthly cost of homeownership. If time is on your side, it might be worth delaying your home purchase until you have a larger down payment saved up.

If time is not on your side, research down payment assistance available in your area. Programs are available at the state or sometimes local level, and they are designed to help eligible buyers obtain some or all the down payment required to get into a home. Talk to a mortgage loan officer to find out about programs in your area.

Lower Your Debt-to-Income Ratio
When you apply for a mortgage loan, you must prove you are able to fulfill your current debt obligations, in addition to the cost of the proposed monthly mortgage payment. To determine this, your debt-to-income (DTI) ratio is calculated. Simply put, DTI is all your monthly debts added up and divided by your gross monthly income. In general, your DTI should be around 45%, or lower. Lenders will typically offer lower rates for borrowers with a lower DTI.

Here is a simple example of how to determine DTI: If your monthly income is $4,000 and you pay a monthly auto loan of $500 and a payment of $100 on a student loan, that means that 15% of your gross pay is tied up in debt. As a result, your house payment cannot not exceed 30% of your income, or $1,200.

2.       Shop for a Home Less Expensive than You’re Preapproved Amount
When you get preapproved for a mortgage loan, you may be surprised by how much home your lender thinks you can afford. This one is simple: avoid the temptation to purchase a home at your maximum approved amount! Instead, aim for a home that costs at least 10% less. This will give your monthly budget some leeway and help you afford unexpected expenses and/or price increases on things like food, energy, and homeowners’ insurance. The less you finance, the lower your monthly payment, making homeownership a little more affordable. This also gives you more flexibility to save for your future which could include a larger home down the road as your needs and lifestyle evolve.

3.       Consider Purchasing an Existing Home
Another way to make homeownership a little more affordable is to consider purchasing an existing home over a newly constructed home. Doing so could save you tens of thousands off the purchase price. According to homeguide.com, the average cost of an existing home ranges from $410,000 to $536,000, while the average cost to build a new home ranges from $487,000 to $645,000. An existing home may require some improvement projects to make it feel like yours, but don’t underestimate the difference relatively inexpensive updates like a fresh coat of paint can make.

Another potential benefit of shopping for an existing home (especially one in need of updates) is there may be fewer buyers looking at that home which increases the odds your offer will be accepted. Inventory remains low, but your ability to overlook a few cosmetic issues could put those keys in your hand much sooner than if you were holding out for the “perfect” home.

4.       Understand the Benefits of an Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes over time. The introductory rate associated with an ARM is typically lower that the current rate offered on a conventional loan and remains in effect for a fixed term which is typically  3, 5, 7, or 10 years. A lower interest rate generally equates to a smaller monthly payment. By paying less each month on your mortgage, you may be able to afford a larger home or simply find breathing room in your budget during the introductory term.

After the initial period ends, the interest rate on your loan may change, depending upon mortgage rates at the time. For instance, if rates have risen since you took out your original ARM, you can expect the interest on your loan to do the same. However, if mortgage rates have fallen, you’ll see a reduction in the interest associated with your loan. During market conditions like we are currently experiencing, where rates have risen for so long and are expected to decline, an ARM may be a consideration.

5.       Shop Multiple Lenders for the Best Deal
Not all mortgages are created equal so it’s important to research and compare at least three different lenders to find your perfect mortgage match. It might be your instinct to go with the lender that offers the lowest rate but be sure to compare items such as up-front or out-of-pocket expenses such as closing costs and taxes that could impact affordability. You may also want a lender who is local, so that you can meet with them if needed and have a person with whom you are connected.

6.       Research Mortgage Rate Lock and Float Down Options
Mortgage rates are constantly changing so it’s important to understand what your rate lock and float down options are when you apply. Securing a rate lock means that your interest rate will not change between the date the rate is offered and your closing date if you meet certain criteria. This is especially important when interest rates are trending upward. In 2024, understanding your float down options are important because experts still hold out hope that rates may drop throughout the year. A mortgage rate float down allows you to lock in your mortgage rate, and if rates fall during the underwriting process, you could still receive the lower rate.

7.       Do Not Skip the Home Inspection
While home inventory remains low, it may be tempting to waive the home inspection to make your offer more attractive to the seller. However, waiving the inspection could cost you a lot of money later when you discover the flaws an inspection would have revealed.

Home inspections are designed to protect home buyers by identifying things such as: major structural or technical issues with the home’s electrical wiring, plumbing, and more; health and safety concerns like mold and radon; if additions/updates such as basement finishes were made following legal codes; and if the major components of the home, such as the roof or HVAC system, are in good health. Fixing or negotiating with the seller to fix these issues could have a significant impact on your budget so it’s best to identify them before you decide to purchase the home. Plus, many insurance companies require a home inspection in order insure a home, so it’s a step you don’t want to shortcut.   

Buying a home in 2024 remains challenging but not impossible. By incorporating some of these tips into your strategy, the path to home ownership could be easier and more affordable than you think. If you have questions about the homebuying process, an FNBO Mortgage Loan Officer can help.