How to get ready to buy a home

For years now, Americans have been down in the dumps about housing affordability.

It’s not hard to understand why: High prices, lofty interest rates, limited supply, and wages that just aren’t keeping up.

So here’s some good news: Things seem to be changing.

Sellers now outnumber buyers by more than 600,000 nationwide, one of the biggest gaps on record, according to Redfin. 

And in over half of the nation’s top 50 metro areas, prices actually dropped over the last 12 months – by the most in cities like Austin, San Diego, San Jose, Minneapolis, and Washington, D.C., according to data from Realtor.com.

“Mortgage rates are slipping below 6%, and conditions are appearing more favorable for buyers,” says Thomas Ravert, a financial planner with Pathway Capital in Nyack, N.Y. “Prospective homeowners may now be considering how to build a down payment fund.”

There’s the key point: As the housing market cools down and prices settle into a range that’s more affordable and sustainable, buyers have some time to start assembling that critical down payment.

Of course those sums can be significant, and won’t come together overnight. But if you haven’t started yet, the best time to begin is right now.

You can improve your outcome by having a strategy in place from the start: Knowing how much to save, where to put it, and weighing what all your mortgage options are before signing on the dotted line.

A few elements to factor into that down payment plan:

-The amount: The more you’re able to put down, of course, the less you’ll have to pay off later. Having more equity in the house will benefit you when you eventually sell, or if you ever run into trouble and have to draw some down via a home equity loan or line of credit.

So if you’re financially able, “the typical 20% down payment remains the gold standard,” says Georgia Lord, a financial planner in Brooklyn, N.Y. “It avoids the need for private mortgage insurance, and can result in better loan terms.”

That being said, you don’t want to stretch yourself too far by depleting all your reserves and leaving you financially vulnerable. So while 20% down is a worthy goal, you do have other options at your disposal.

For those who qualify – typically low-to-moderate income borrowers -- there are USDA loans (0% down), VA loans (0% down), FHA loans (3.5% down), and even conventional loans like Fannie Mae HomeReady and Freddie Mac Home Possible (3% down). To start researching special loan programs, here’s a fact sheet from the Consumer Financial Protection Bureau.

-The account: While your savings start building, you want an account that will generate interest, while not being overly high-risk. For instance, you don’t want that money invested in equities, where the value could drop at any moment and blow up your homebuying plans. Nor do you want that cash ‘locked’ in instruments that will penalize you for drawing it out early, such as many Certificates of Deposit.

Says Ravert: “Because down payment funds are usually intended for a near-term purchase, they are often kept in low-risk, liquid accounts such as high-yield savings accounts.”

With a healthy return, you can kick off the positive cycle of adding interest to whatever you’re able to save. With Current’s Savings Pods, for instance, you can earn up to a 4.00% bonus, compared to .01% you might encounter at many big banks.

-The credit score: Since putting together a down payment will take time, here’s a way to double down and make that phase really count: Work on boosting your credit score in the meantime.

Every improvement you make will lower the mortgage rates you will be offered. For instance, for a 30-year fixed mortgage, those with a 620 credit score might expect a 7.17% rate, according to recent figures from Experian. Meanwhile someone with a 740, in comparison, would typically get offered a 6.4% rate.

That difference, over time, is massive – easily in the tens of thousands of dollars. Using a secured charge card like Current’s Build Card, can help give your credit score a boost, while minimizing your risks of debt. With the Build Card, as you spend, the funds are held in reserve to ‘pay your bill’ at the end of each month and those on-time payments are then reported to the three major credit bureaus (Equifax, Experian, TransUnion). Members have an average 81-point increase in their credit score within the first six months of using the Build Card. 

So while falling prices and mortgage rates are certainly good news for potential buyers, you have some advance work to do. Then, when the time is right, you will be ready to strike.

“The right time to buy isn’t dictated simply by rates dropping,” advises Lord. “The right time to buy is when you have a longer-term horizon, the monthly payment fits comfortably within your broader financial plan -- and you can fund retirement and all your other goals, simultaneously.”