Everyone eventually gets to the point where they’re sick of paying someone else money for where they live. Apartments and roommates get old and eventually purchasing a house of your own sounds like the natural next step. But since buying a home in Denver is borderline impossible, it’s time to look for mortgage lenders in Fort Collins or another small city nearby.
The housing market is out of control, at least that’s what everybody says. In Colorado, the 15th most expensive state for cost of living in 2022, buying a home can be a daunting and overwhelming step.
You may feel rushed to get into the housing market before it explodes even further, or you may feel so uninspired by the current prices that you put off buying a home. But don’t let the outside noise sway you one way or the other; learn the facts and decide for yourself. To help, we’ve broken down five misconceptions about buying a home for the first time.
1. It’s Cheaper To Rent Than To Own
Depending on where you live, this could be true, especially in the short term. Especially in Colorado where chances are, your rental rates will increase after each lease, getting into a fixed mortgage rate can provide stability and allow you to make payments for your own space.
Using Zillow’s rest versus buy calculator, you can determine if buying or renting would save you money in the long run. For example, the typical home value of a house in Fort Collins is roughly $585,128. Using the calculator, assuming a downpayment of 10 percent for a house of that price, and assuming a comfortable monthly rent of $2,000, buying will be cheaper than renting after six years. If you can put down a down payment of 20 percent, buying will be cheaper than renting after five years.
So it can take time to see the financial benefits of buying but in the long term it can save you tens of thousands.
2. It’s A Bad Time to Buy
A general rule in the business is: if you found a house you really like, get it, as long as you can follow the “30/30/3 rule”:
- Spend no more than 30 percent of your gross income on a monthly mortgage
- Have 30 percent of the home value saved
- The price of your home should be no more than 3-times the amount of your annual gross income
In Colorado, according to Moody’s Analytics, Colorado had a net inbound migration of 52 percent from January 2021 to February 2022, meaning that more people are moving to Colorado than out of the state.
So although we’re in a housing boom, prices are generally only trending up, making no time like the present as the ideal jumping-in point. Below are some predictions about interest rates from economists, first listed by Forbes.
- Mortgage Bankers Association (MBA): “Mortgage rates are expected to end 2022 at 4.8%–and to decline gradually to 4.6%–by 2024 as spreads narrow.”
- NAR’s Yun: “All in all, the 30-year fixed mortgage rate is likely to hit 5.3% to 5.5% by the end of the year. Some consumers may opt for a five-year ARM (adjustable-rate mortgage) at 4% by the end of the year.”
- Matthew Speakman, senior economist at Zillow: “Competing dynamics suggest that there will be little reason for mortgage rates to decline anytime soon.”
3. You Need a 20-Percent Down Payment
Though a 20-percent down payment has been perceived as the industry standard and expectation, studies show the average down payment for a home is now 12 percent.
With so many home loan options available these days, and with daunting housing prices, homebuyers can put down as little as 3 percent, or even zero percent if you qualify for a down payment assistance program, a VA loan, or a USDA loan. It’s a personal decision how much you put down, but there are some tradeoffs for certain down payment rates.
A higher down payment rate will lower your monthly mortgage payment but can take longer to accumulate before being able to buy a home. Using a larger down payment will also lower your interest rates in the long run. A smaller down payment can be easier in the short term but could end up costing you more down the road.
So it’s ideal to put down a higher down payment, but this is often unrealistic. Make sure you understand your options
4. You Need A Spotless Credit Score
It certainly helps to have a perfect credit score, but it’s not the only factor lenders take into account for aspiring homebuyers. Lenders also look at your income, debts, assets, property type, and others when determining mortgage qualifications.
For those with a lower or less-than-ideal credit score, there are options for you, such as programs within the Federal Housing Administration tailored for lower scores. Make sure you know where your credit score stands, but let it be the sole reason you do or do not purchase a home you want.
5. You Must Pay Off Student Loans First
It is true that the less debt you have, the more likely you are to qualify for a decent mortgage, but let your student loans stop you from buying the right home. Lenders will look at your debt-to-income ratio (DTI) to determine how much money you spend compared to what you make and see how much you put toward debts each month.
If you make good on your payments or have a track record of doing so, your remaining student loans shouldn’t affect your mortgage rates much. An ideal DTI ratio would be 50 percent at the most, although the less the better.
Summary
Don’t let the buzz from the recent explosion in the housing market delay your dreams of purchasing a house. The best way to stay informed is to know your credit score, have money saved and ready to invest in a house, ideally put down a decent down payment percentage, and make payments on your debts to prove reliability to lenders.
As the housing market in Colorado is expected to continue to grow, if you’re able to get in the market then it’s recommended you do so before rates continue to rise. But there are loan options available for those that need to put down less at the beginning of their home-buying journey.
