Buying a house is a minefield full of “I didn’t know thats.” From choosing the right home to qualifying for the best mortgage, you want to minimize the things you don’t know.
So let’s lower your “didn’t-know” ratio. With a shifting lending landscape, unpredictable interest rates and down payment priorities based on your local market, here’s what you’ll need to know about buying a home in 2020.
What’s the first step to buying a house in 2020?
With acute shortages of homes for sale in so many markets throughout the nation, getting a preapproval for a home loan is more important than ever. Cash buyers used to give sellers confidence that a deal would close quickly, but fewer cash buyers are shopping right now. And when houses weren’t in such short supply, buyers didn’t face the pressures of intense seller’s markets.
With a lender lined up and a preapproval letter in your pocket, sellers know you’re serious.
“With a preapproval, [sellers] feel comfortable that, ‘Hey, this guy is a legit person who is going to buy and close,’” says Mat Ishbia, CEO of United Wholesale Mortgage in Pontiac, Michigan.
“[Prospective buyers] need to immediately start with the lender,” agrees Patti Michels, a real estate agent in Hinsdale, Illinois, a suburb of Chicago. “See what you can afford and see what your hurdles are going to be.”
Michels says shopping for homes before gaining a loan preapproval is a big home buyer mistake. “[Some buyers] don’t realize how many underwriting deal breakers there are” that can hijack — or significantly delay — getting a mortgage.
What credit score is needed to buy a house in 2020?
A FICO of 620 is typically the minimum credit score needed to buy a house, Ishbia says, though some lenders will go down to 580 or below.
“What I would consider is average credit is 620 to 680,” Ishbia says. “Very good credit is 680 to 740, and if you’re over 740, you’re spotless.”
How much house can I afford?
‘How much house can I afford?’ is the first-time home buyer question Ishbia says he is asked most often. He offers a rule-of-thumb to help.
“Instead of telling them about debt-to-income ratios,” Ishbia says, he tells first-time buyers to consider three times their income as a starting point.
So, if you and your spouse have a combined annual income of $110,000, “most likely $330,000 is your price range, plus or minus a couple of percent,” he says.
But rather than guessing, you can simply take the first step — talking to a lender.
“That’s why you get the mortgage first,” Ishbia adds.
2020 mortgage rate trends
Mortgage rates have lingered around 4% APR for months now, and, barring an economic surprise, are expected to remain favorable this year.
“Mortgage rates aren’t expected to move much in either direction in 2020. If the forecasts are accurate, mortgage rates aren’t likely to go up a whole lot,” says Holden Lewis, who produces NerdWallet’s mortgage interest rates forecast. “That’s faintly encouraging to the legions of people who have difficulty finding affordable homes to buy. After all, if mortgage rates remain steady, those home shoppers won’t have to worry that rising rates will push monthly payments past their limits of affordability. But they still have to contend with rising home prices.”
In 2019, more than a third of Americans said they planned to buy within the next five years — and nearly one-fourth of those prospective buyers said they’d buy in the next 12 months, according to NerdWallet’s 2019 Home Buyer Report.
“Anytime you can snag a mortgage rate around 4%, you’re doing well,” Lewis adds.
Down payments in 2020
“People still think they need 20% down,” Ishbia says. “Three percent down, 5% down are the ways people are buying homes.” In fact, 6% was the median down payment for first-time home buyers who financed a purchase in 2019, according to a report by the National Association of Realtors. For repeat buyers, the median down payment was 16%.
“You don’t need 20% down to buy a home. It’s the biggest myth out there,” he adds.
Except if you’re in a competitive real estate market, Michels cautions.
“I think 20% down — especially in a tight market — is going to come into play,” she says. “If somebody else has 10% and you’ve got 20, that’s going to be a factor.” Michels says listing agents will usually advise sellers to go with the buyer who has the most cash on the table.
“When it comes into play is when you’re up against someone else on a home you really want,” she adds.