On January 1, 2022, a 30 year mortgage rate was at approximately 3.25%. It is looking like we will finish the year somewhere in the mid 6’s on a 30 year rate. If you do the quick math, this means that mortgage have DOUBLED in 12 months. This unprecedented rise in rates has caused many potential buyers to “pump the brakes” on purchasing a new home in 2022. However, many economists and industry experts are expecting a decline in rates as early as spring of 2023 (or sooner). They may not get back down to the record lows we saw in 2021, but the decrease should bring potential buyers back out to begin searching for that new home to purchase. If that’s you, below are a few things to make sure you are as prepared as possible to purchase that dream home.
-Monitor your credit score.
I would recommend you do this even if you aren’t in the market to purchase a new home. Keeping up to date on your credit profile will allow you not only to track your score, but also alert you to any suspicious activity or notify you of any changes that would negatively impact your score. There are several free credit monitoring services available. However, those will typically give you a “general idea” of how your score looks and may not give you an accurate score. For a small monthly subscription fee, all three of the major credit bureaus (Equifax, Experian, and Transunion) offer credit monitoring services. Even though these come at a small cost, they will give you a much more accurate picture of your credit profile and even give you ways to improve your score if it’s not where it needs to be.
-Payoff any tax liens, judgments, or collections
Typically, any tax lien or judgment against a borrower has to be paid off at or prior to closing. This is because outstanding tax liens and judgments will attach to the purchased property and cause title problems. A collection account is a little different in that collections are not always required to be paid off at closing. However, outstanding collection accounts can drastically lower your credit score. Paying off any judgments, liens, or collections will raise your credit score and eliminate any issues they may have caused in obtaining a loan.
-If possible, do not apply for any new credit in the months leading up to purchasing a new home.
Sometimes new credit is unavoidable. Cars break down or accidents happen. Emergencies come up. But, if at all possible, try not to open any new credit accounts in the months leading up to the purchase of your home. There are a couple of reasons for this. First, typically when you have a “hard inquiry” on your credit report (i.e. when a company checks your credit to see if you are credit worthy to lend to), it will drop your score. Depending on what type of lender is pulling the credit, this decrease can range from just a few points to a major drop in your credit score. Secondly, if new credit accounts are opened up, many times additional documentation may be required to verify the balance, payment, etc. of the new account. New credit can also negate a prior preapproval in some cases. If at all possible, avoid opening new accounts if you are considering purchasing a new home.
-Pay down high balance credit cards.
Credit cards that are over the max limits or close to the max limits can negatively affect your credit score in some cases as much as a 30 day late payment. Optimally, credit card balances should be kept at 30% of the max balance or less. So, if you have revolving accounts (credit cards) that are at or close their limit, do your best to get those paid down. Your credit score will thank you.
If you think you will begin looking for a home within the next 90 days, go ahead and contact a mortgage professional to get preapproved for a loan and make sure everything is in order. Do not wait until you find a home and are ready to make an offer to see if you can be approved. Time can be of the essence and you want to make sure you are ready to go. Getting preapproved early allows you to address any issues that may come up in the approval process. It also allows you to be ready in case that perfect home pops up on the market.
-Do your research.
Look into the real estate market in your area or wherever you may be looking. See what type of homes are available. See what type of homes fit your budget. Be familiar with locations of these homes, how long they have been on the market, school systems, etc. Educate yourself about the current real estate market where you are looking to purchase before diving in. That leads to the last tip…
-Contact a realtor.
Find a local, trusted realtor who can help you find homes, answer questions about those homes, take you to see those homes, and help negotiate an offer and contract. A huge part of educating yourself could be talking with experienced local agents who know their markets inside and out. The best part? An agent’s expertise is free to a buyer! A buyer will usually not pay their agent a dime, as real estate agents are paid off the commission of the sale of a home (seller’s expense). Take full advantage of their knowledge and expertise.
Obviously this list is not exhaustive, but if you are in the market for a new home in 2023, the above tips will set you up for a successful transaction. If you have any other questions, contact a mortgage or real estate professional. Happy house hunting and Happy New Year, everybody!
Josh Moody has decades of experience in residential mortgage lending and is with The Mortgage Center in Cullman, Alabama. He resides in Gardendale and is a contributor to North Jefferson Magazine.