The Real Deal

Mortgage rates just hit a 22-year high, take these 4 steps today to prepare for a home purchase tomorrow

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Mortgage rates just hit a 22-year high, take these 4 steps today to prepare for a home purchase tomorrow

Average 30-year fixed mortgage rates are sitting at a 22-year high, and home prices continue to inch higher, exacerbating the market for homebuyers. In the last year, a buyer with a $3,000 budget has lost $71,000 in buying power, according to Redfin.

As disheartening as it can be when factors outside of your control get in the way of your dreams, there are steps you can take to regain agency over your homebuying plans. Remember, even when the market as a whole seems hostile to buyers, you only need to find that one home where everything comes together. These four tips can help get you ready to act when you come across a good deal and the timing is right for you.

4 tips to prepare for a home purchase

Rather than wait for a housing crash or for mortgage rates to dip, take these steps to put yourself in the driver’s seat. Over time, saving money, paying off debt, managing your credit score and educating yourself will greatly increase your chances of becoming a homeowner.


1. Save as much as possible

Even with the help of a mortgage loan, purchasing a house requires a lot of expensive, upfront costs. You’ll have to come up with money for a down payment and closing costs, and after you complete the purchase you still have moving expenses to cover. And building an emergency fund becomes more important because you’re responsible when the toilet’s leaking or the roof needs to be repaired or any of the other surprise repairs that come with homeownership.

When you’re saving for a home purchase, you’ll typically want to take advantage of bank products where your money isn’t exposed to the risks of the stock market. Today’s high interest rates make borrowing more expensive, but they have also boosted the return available for money market accounts, high-yield savings accounts and CDs. Some of these accounts even offer returns that exceed the current inflation rate. For example, the Western Alliance Bank Savings Account offers a 5.25% APY with no monthly fees and no cap on the balance that earns this rate of return.

Growing your savings doesn’t just help you pay for the upfront costs of buying a home — it also makes it easier for you to secure a cheaper mortgage. This is because one of the factors behind the mortgage rate you qualify for is the size of your down payment. A larger down payment helps you secure a lower mortgage rate because it reduces your loan-to-value ratio (LTV).


2. Create a plan for your debt

The more debt you have, the more difficult it is to afford a home. So it’s important to avoid taking on new debt and to work on paying existing debt down. As your debt-to-ratio (DTI) decreases, how much you can borrow goes up. The max DTI for a mortgage is typically 45% (although it can be higher), which means your monthly debt payments (including the future mortgage payment) cannot exceed 45% of your monthly pre-tax income. Although a bank might give you a loan that costs 45% of your gross income, experts recommend spending no more than 28% of it on housing.

It’s a balancing act between paying down debt and saving for a downpayment. Depending on your situation, it could make sense to consolidate your debt. Consolidating multiple credit card debts that each charge a high interest rate into one debt with a lower interest rate, for example, saves you money while you make your payments. Some of our favorite debt consolidation loan lenders include Upstart and Upgrade.


3. Closely examine your credit

One of the best ways to lower your mortgage interest rate is to improve your credit score. A lower mortgage rate will reduce how much you pay each month. Even if you feel like you’re not saving money fast enough, building your credit brings your homeownership dreams closer to reality.

Start by reviewing your credit reports for free and disputing errors you find. Services such as Experian Boost and eCredable Lift could give your credit score a short-term boost, but it’s the long-term habits that make the biggest difference.

The FICO scoring model is the most widely-used credit score and it’s based on factors such as the age of your accounts and your credit mix. However, the factors behind your FICO Score aren’t weighted evenly — your payment history and the amounts you owe account for 65% of your score. This makes it especially important to consistently pay your bills on time and to reduce your debt.


4. Educate yourself

To learn the basics of buying a home, you could meet with a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD). A HUD-approved housing counselor can help you understand industry jargon and walk you through everything you need to know about the home-buying process. They can also help you find homebuyer assistance programs you qualify for. These programs offer financial assistance for down payment and closing costs in the form of grants, forgivable loans and no-interest loans.

It’s also important to learn about the housing market of where you want to live. Local real estate professionals, such as an agent or a mortgage lender, can help get you up to speed on the rules and norms of the neighborhood. This knowledge could give you an edge when it comes to finding easy-to-miss opportunities or avoiding costly mistakes.

The biggest expenses are the down payment and closing costs, so you’ll want to understand your mortgage options. Getting a mortgage pre-approval will give you a good idea of how much house you can afford. Be sure to talk with a handful of lenders because the types of loans they offer and the rates and fees they charge vary. And some mortgage lenders may work with specific first-time homebuyer assistance programs, while others will not.


Bottom line

Buying a house right now is tough. Home prices have stayed strong while mortgage rates have spiked, further increasing the cost of a home purchase.

But even if you can’t find a home you want at a price you can afford, there are steps you can take right now that will get you closer to becoming a homeowner. Saving money and paying down debt are important, but building your credit score and educating yourself can be just as valuable.