Rising mortgage rates and home prices have made 2022 a great time to be a homeowner and a tough time to be a homebuyer, which has led to a wave of FOMO (Fear Of Missing Out) amongst homebuyers.
In fact, nearly 70% of respondents regret waiting to buy or refinance their home when rates were lower, according to a survey by U.S. News & World Report.
But when life hands you lemons, you make lemonade. Homebuyers that missed out on record low mortgage rates, still have time to lock in a rate that is historically very low and start earning home equity instead of chasing home prices.
We asked Beverly Harzog, U.S. News & World Report personal finance and credit card expert, how home shoppers with FOMO can jump start the homebuying process.
Here are her 7 pieces of advice for homebuyers just beginning their search:
- Dust yourself off and move forward
- Be realistic about what you can afford
- Increase your down payment
- Increase your credit score
- Focus on paying down debt
- Get ready for a credit check
- Research down payment assistance and other resources
Nearly 70% of prospective homebuyers regret missing out on lower rates. According to Harzog, this is a completely natural human emotion. Start by giving yourself a break and moving on.
“You can’t predict the future – hindsight is 20/20,” Harzog said. “Accept the fact that it is what it is, dust yourself off, and move forward.”
In Harzog’s experience, people usually wait to buy a home because there is something holding them back. Perhaps they’re not quite ready to make such a big financial decision or they don’t have enough money.
But for those who are ready, Harzog’s advice is to get moving as soon as possible.
“If you are going to buy a house this year, get all your ducks in a row now,” she said. “Start looking at locations, think about your down payment, how much do you need to save up. I think rates are going to go up this year and inflation is going to keep going up. If you want to lock in a mortgage rate, I suggest you do that sooner than later.”
According to Redfin, more than 70% of home listings receive two or more offers – known as a bidding war. That means the price you see while searching on Zillow is likely lower than you’ll end up paying for the house.
Harzog said homebuyers should research their desired location down the specific neighborhoods to get a sense of how much homes are going over the asking price.
“Maybe the house you want is $500,000 in a specific neighborhood, but are similar houses in that neighborhood going for $50,000 over that?” Harzog said.
If that’s the case, homebuyers should lower their target price range to account for the reality of bidding wars. This can reduce the disappointment of losing a bidding war and the temptation to overextend your budget to win one.
“Think about what you can really afford and act accordingly – it’s a bit of a nightmare to stretch yourself and buy a house that you can’t really afford,” Harzog said.
The key to setting realistic expectations, according to Harzog, is taking the home search as local as possible.
“Don’t rely on national media to tell you what’s happening in your own area,” she said. “When you get really down for a specific home and specific area, you’ve got to do a little more legwork of your own.”
Cash is king in today’s market, and will be for some time. If you can’t afford a home right now, use this time to save money for a down payment.
A larger down payment can help you win bidding wars, reduce your monthly payment, lower your mortgage rate, and help you avoid private mortgage insurance.
“There’s a lot of volatility in the market right now, and if you decide you can’t afford to buy the home you want right now, use the time to increase your down payment,” Harzog said. “That increases your purchasing power.”
Just like a larger down payment, a higher credit score increases your purchasing power by helping you qualify for a better mortgage rate.
“A 760 FICO® Score should qualify for the lowest mortgage rates,” Harzog said. “That can save you so much money – thousands of dollars over the life of a mortgage.”
One way to do this is to keep your credit utilization low. This refers to the amount of credit you are using compared to the amount available. A utilization ratio below 10% builds credit, said Harzog.
For example, if the limit on your credit card is $5,000, keeping your balance below $500 can help improve your credit score.*
Another way to improve your purchasing power is to pay down debt. This helps in two ways:
- It can help improve your credit score
- It lowers your debt-to-income (DTI) ratio, which lenders use to determine if you qualify for loan programs
DTI is measured by adding up your monthly expenses (car payments, student loan payments, credit card bills) and dividing it by your gross monthly income.
“If you’ve got debt and you are already concerned about rising prices, work on paying down your debt first. If you bring your debt down, your credit score will go up and DTI will go down,” Harzog said. “That’s a good way to increase your purchasing power because you can get a better mortgage rate and decrease your monthly payment.”
Before approving you for a mortgage, lenders will perform a credit check. With fierce competition over scarce inventory, the last thing homebuyers need in this market is an error in their credit report spoiling their loan approval.
Harzog advises homebuyers to check their credit report for free using annualcreditreport.com and dispute any errors in the report. This should be done before the homebuying process to remove any speed bumps or complications.
Annualcreditreport.com typically offers a free copy of your credit report every 12 months. However, it has been offering free weekly reports during the COVID-19 pandemic.
Note from Home.com: Annualcreditreport.com is a great place to start but it does not show your credit score, only your report. Sign up to see your mortgage FICO® Score for free at ScoreGenius.
Finally, Harzog recommends that homebuyers look for resources on the national, state, and local level. There are far too many to list here, but many markets have down payment assistance programs through government agencies and nonprofits.
The key is not only taking the time to find them, but to really read into the guidelines.
“Some programs consider you a first-time homebuyer if you haven’t purchased a home in 3 years,” Harzog said. “That opens up possibilities for a lot of people. Don’t just assume you won’t qualify, dig into the guidelines to see if you do or not”
Even if down payment assistance isn’t available, it may be worth looking into a first-time homebuyers course or credit counseling to better understand the process.
Harzog suggests starting with the Department of Housing and Urban Development’s list of state resources.
It’s natural for homebuyers to have FOMO if they missed out on sub-3% interest rates – it would be weirder if they didn’t regret saving some money.
But that doesn’t mean they should give up. Starting with Harzog’s first step – dust yourself off and move forward – homebuyers can turn FOMO into homebuying fuel.
*Fairway is not a registered or licensed credit repair organization.