Lately many first-time homebuyers have been itching to get their feet wet in the NYC housing market, especially with mortgage rates being at historic lows – and there’s nothing wrong with that. Real estate will always be in demand, and it’s natural for people to want to take advantage of an opportunity to own a home.
However, low mortgage rates should not be the only motive for taking the plunge into homeownership. Buying a home is a life-changing decision so before deciding now is a good time for you to begin your journey as a first-time homebuyer, there are some key factors you need to be conscious of.
The local market
It’s important to do your due diligence and study the neighborhood(s) you’re interested in:
Are the homes in good condition?
Are there homes that suit your needs?
What’s the price history of the market?
Otherwise, there may be long-term repercussions. For example, if a home is not in good condition, there’s a chance major repairs will need to be done down the line. You also don’t want to find yourself buying an overpriced home.
I’ll admit this is easier said than done since we live in the era of information overload and not enough time. Fortunately, a trusted real estate agent can dedicate their time into painting a clearer picture of the market by informing you on whether prices are too high, or if the current inventory is right for you based on your needs.
Your financial health
Knowing the state of your finances is paramount when applying for a mortgage loan, especially today. Though mortgage rates are low, lending requirements have become stricter leaving lenders to be extra precautious when evaluating your “risk”. Lenders look at four things to determine your risk: your savings, your debt-to-income (DTI) ratio, your credit score, and your employment status.
Lenders look at your savings to know how much can go towards a downpayment, and whether you have at least 3-6 months of emergency funds covered.
An average downpayment is 25% of the purchase price, though it’s possible to put as low as 20%, or less with an FHA loan. However, the more funds you put towards your downpayment, the more likely you are to receive a loan, and the less you will need to pay over time in interest and principal on your monthly mortgage payments. Think of a downpayment as an investment on your mortgage loan. It’s also helpful to know there are downpayment assistance programs specifically for first-time homebuyers.
The reason for needing at least 3-6 months of emergency funds in your savings is to show lenders how prepared you are to make your future mortgage payments. Overall, the more savings you have the better. Keep in mind, there are other typical upfront buyer costs your savings will need to cover.
Debt-to-income Ratio & Credit Score
Your debt-to-income (DTI) ratio and credit score go hand-in-hand in providing lenders a picture of how well you manage debt – a mortgage loan is a debt after all.
Your DTI ratio is the percentage of your monthly gross income used towards paying debts. A DTI ratio between 28-30% is considered a good range, but the lower, the better.
Your credit score represents how much risk you carry as a borrower. Some lenders require a minimum of 700, but it is possible to receive a loan with a lower credit score. However, the higher your credit score, the lower risk you pose to lenders, and the lower your interest rate will be.
It may seem peculiar to know lenders care about your employment status, but they want to know how consistent you’ll be with your future mortgage payments based on how steady your income is.
If you stayed with your current employer for 2 years or more, your risk is low as long as you can provide proof of employment. However, if there are employment inconsistencies within that period, this may raise a red flag. In this case, lenders may request letters of explanation for the unemployed periods.
The key is to be prepared to provide as much proof as possible of your employment status. For example, if you are self-employed, you should be ready to provide documents like a profit & loss statement. Lenders may even request updated financial documents days before closing, so be ready always.
The buying process
Nowadays apps can get you what you need in seconds, but that’s not the case with buying a home. It may be surprising to know it can take approximately 1 year to have the keys to your new home:
1-2 months to build your team (and get a pre-approval letter)
2-3 months to search your home
3-4 months to close on a deal
The timeframe varies from person to person since every transaction is unique. For example, you may find after examining your finances you need additional time to save more money or improve your credit score.
Be mindful the mortgage approval process may take longer since many aspects used to take place in person. The same goes for viewing homes, and meeting with co-op boards for board interviews if you choose to purchase a co-op.
If you feel you’re ready to purchase a home after thoughtful consideration into all of the above, then go for it, especially with mortgage rates being so low (fixed rate, anyone?). Keep my homebuyer checklist handy to make sure you stay on track during the buying process.
Don’t rush if you’re not entirely set on buying a home. It’s always better to be prepared and have your finances in order. The clearer your financial health appears, the more confidence you'll have in taking the next steps towards your journey to first-time homeownership. Don't hesitate to reach out for more resources and extra guidance at any point along the way.