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You’ve made your decision — 2020 is the year you finally become a homeowner. You aren’t alone on the path toward homeownership, as a whopping 9.2 million first-time home buyers will enter the market over the next three years. Between bidding wars and limited housing, many hopeful buyers will have a hard time getting into a place of their own.
That’s why it’s important to understand the home buying process ahead of time. The more informed you are about loan limits, financing options, and the market in general, the greater your chances of achieving this goal. Here’s what first-time buyers should know in the new year.
Conforming loan limits are increasing
The Federal Housing Finance Agency (FHFA) recently announced another increase for conforming loan limits. The 2020 loan limits for Freddie Mac and Fannie Mae will be raised to more than $510,000, an increase of $26,000 from 2019. For those who don’t know, these loan limits are determined by the Housing and Economic Recovery Act (HERA) of 2008, which mandates that the limit be adjusted annually to account for the latest market changes.
What does this mean for first-time home buyers in 2020? Well, the increase actually works to your advantage, in that higher loan limits allow you to afford more home. For some buyers, increased conforming loan limits could mean skipping a starter home in favor of a larger home that’s more conducive to raising a family. On the other hand, the increase could benefit those living in higher-cost areas who had previously struggled to find affordable housing.
There are a number of loan options
An owned home is likely the biggest purchase you will make in your lifetime. It’s an investment that, over time, can be cheaper than renting. Yet many prospective buyers will shy away from homeownership in the new year over concerns of not having a sufficient down payment.
It’s often assumed that a borrower must have a sizable down payment in order to qualify for a mortgage. This notion couldn’t be further from the truth! An FHA loan allows you to get into a home of your own with as little as a 3.5% down payment. Military families, meanwhile, can benefit from a VA loan, which requires no down payment and no mortgage insurance for qualified borrowers.
A budget can be your best friend
Just because you may benefit from increased loan limits and various loan programs doesn’t automatically make you a good candidate for a mortgage. Keep in mind, you will still be on the hook for student loans, car loans, and credit card debt after you buy a home. This is where a budget comes into play.
Understanding what you typically spend on bills, groceries, and transportation gives you an idea of how much you could spend on a mortgage. Notice we said “could.” When you apply for a mortgage, you will be approved up to a certain amount, say $400,000. However, depending on what you set aside for current monthly bills and essentials, it may be in your best interest to buy a home that costs less than what you’ve been approved for. The last thing you want is to be house-poor soon after closing on your first place.
A pre-approval letter can give you an advantage
In a hot housing market such as this one, you’ll want to set yourself apart from other buyers as much as possible. A pre-approval letter can help you do just that. Lenders will see that you’re serious about buying and you’ll have a better idea of how much home you can afford.
The market remains favorable
There’s no question that 2020 will be a big year for first-time home buyers. Before digging too much into potential loan options, take some time to explore where you want to live. Consider factors such as average sales prices, the number of homes currently on the market, as well as the average time on the market for homes in your price range.
The right lender makes all the difference
Once you have your finances in order and know which market is right for you, you’re ready to talk with a lender. Save yourself the headache and work with a lender who will walk you through what it takes to become a first-time home buyer in 2020.
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