How to buy a home in a cooling market, according to top-ranked advisors

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Becoming a homeowner can be challenging enough under the right circumstances.

Add in higher mortgage rates, soaring home prices and unrelentingly high inflation – ie the current home buying environment – and it may feel decidedly out of reach.

According to Mortgage News Daily, the average interest rate on a 30-year fixed-rate mortgage stayed above 7% for most of October, more than double the 3.3% through 2022. Meanwhile, the average list price for a home in the US was last month at $427,000, up 13.9% from a year ago, according to Realtor.com’s latest monthly report.

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However, conditions appear to be generally shifting in favor of buyers as demand continues to fall. Amid higher interest rates — making payments less affordable and reducing the pool of potential buyers — average home prices have been falling monthly since hitting an all-time high of $449,000 in June, according to Realtor.com.

While it’s impossible to know for certain what house prices or mortgage rates will be in the months and years to come, there are ways to ensure you’re in the best possible financial position to enter the market as a buyer, whether or not sooner or later road.

Here are some tips to help you prepare.

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Know how much house you can afford

The first thing to do is figure out how much house you can really afford, experts say. This means that you have a good handle on your current financial situation.

“Understand your current budget…what are your expenses, what are your expenses, would you need to make any changes,” said certified financial planner Sandy Higgins, senior wealth advisor at Capstone Financial Advisors. Based in Downers Grove, Illinois, the company was ranked #77 on the 2022 CNBC Financial Advisor 100 list.

While buying a home is a one-time transaction, affordability largely depends on monthly mortgage payments.

Existing home sales are down 23.8% year-on-year from 2021

“Remember, don’t spend more than 25% to 28% of your gross monthly income on your payment, including taxes and insurance,” said CFP Dean Karrash, a director at BLB&B Advisors in Montgomeryville, Pennsylvania. The company was ranked 87th on CNBC’s FA 100 list.

The home purchase transaction itself also generally involves costs such as mortgage fees and other closing costs such as property transfer taxes or the price of a title search. These one-time costs can run into the thousands of dollars.

You should also consider the ongoing costs that come with home ownership, such as maintenance and repairs.

“Try not to be rich in homes and poor in cash,” Karrash said. “You’ll find that there are many things you can’t do, like afford a replacement vehicle or go on vacation.”

Make improvements to your credit score

As you may know, the better your credit score, the lower the interest rate you can take out on a variety of loans, including mortgages. According to Zillow analysis, homebuyers with lower credit ratings can pay nearly $104,000 more over the term of a 30-year fixed-rate mortgage than someone with an excellent score (based on a home price of approximately $354,200).

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“Look at your current credit score and see if you need to make any improvements,” Higgins said.

In general, a score of 740 or higher gives the best mortgage rates. Note, however, that the scores you see online for free — so-called educational scores like VantageScore — aren’t typically what lenders use in the approval process.

Look at your current credit score and see if you need to make any improvements.

Sandy Higgins

Senior Wealth Advisor at Capstone Financial Advisors

While mortgage lenders pull your score from the big three credit bureaus — Equifax, Experian, and TransUnion — it’s a specific FICO score that’s used and may differ from an education score.

Regardless, financial habits like paying your bills on time and getting rid of high credit card debt can help increase your score.

Save for a deposit

Another part of calculating how much house you can afford is the down payment, which helps determine how much credit you need to take out. The less you borrow, the less interest you pay overall and the smaller your monthly mortgage payments. A larger down payment can also sometimes help you get a better mortgage rate.

“We typically advise people to put at least 20% down to avoid personal mortgage insurance,” Karrash said.

This type of insurance is designed to protect the lender if you default on your loan and is typically applied to mortgages that represent more than 80% of the home’s value at the time of purchase. It can cost anywhere from 0.58% to 1.86% of the loan value.

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If a 20% down payment seems out of reach, be aware that many home purchases involve a much smaller amount: First-time home buyers pay an average of 7%, according to the National Association of Realtors. For repeat buyers, the average deposit is 17%.

‘Keep an Emergency Stockpile’

Aside from things like property taxes and home insurance, there are other costs that come with owning a home such as: B. Paying the bill for maintenance and repairs. These expenses can easily cost you thousands of dollars at a time.

Before you buy a home, make sure you have savings to cover those surprise expenses or other unexpected impacts on your income or budget, Higgins said.

“You should have an emergency supply,” she said. “When you own a home, more of these unplanned situations happen.”

Financial advisors recommend having at least three to six months’ income in a savings account that you can use in the event of unforeseen expenses.

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