Lately, it seems that many people are considering buying a home. With interest rates low and demand high, it can be a tough decision! Whether you’re considering an upgrade for more space or a downsize to prepare for retirement, you may be asking yourself if you should jump in and buy a house this year. But is it a good time to buy?

Over half of homes this year have been selling for over asking price due to the hot market, and that’s only one of many reasons people may want to wait on this large purchase.

However, there are also plenty of reasons it could be the perfect time for YOU to buy. We’ll help you decide here! First, we’ll go over the local market conditions, housing affordability, your personal finances, whether it’s a buyer’s or seller’s market right now, the difference between prequalification and preapproval, and the best time to buy a house.

Housing Market Factors to Consider

Potential homebuyers eager to start looking for a home to purchase have faced a harsh reality. Because the housing market is so hot right now, most homes are selling for over asking price.

So the big question is: should you buy a home in 2022 or wait until next year?

Pro: Mortgage Rates Are Historically Low

Some potential homebuyers seem to be anticipating home prices falling, but even the experts have difficulty predicting the trajectory of the housing market. For example, speculation suggested that the market would slow down in 2021, but high demand and low supply said otherwise.

Plus, there is a downside to waiting patiently for the prices to fall. You could risk mortgage rates rising, even if they are at a record low this year. Check out this scenario to calculate your situation:

Let’s say you buy your first home for $500,000 at a 3.1% interest rate, with 20% down and a 30-year mortgage. Your monthly payments would be $1,708 before taxes, insurance, and other additional costs. Over the lifetime of the loan, you’ll pay the loan and interest at $614,918.

Assuming the home would be priced at $450,000 in a cooler market in 2022, with the mortgage rate going up by a single percentage point over the next year (4.1%), your monthly payments would be $1,739 before taxes, insurance, and additional costs, your total amount owed would be $626,403.

By paying $50,000 more while locking in that lower mortgage rate, the first scenario predicts that you will save money over the life of the loan by buying soon.

Although it’s impossible to predict what will happen in the market accurately, you won’t necessarily save money waiting around patiently for the market to cool down. According to the second scenario, you could end up paying more waiting for a better deal that may never come.

Pro: Rent Has Increased to Match the Mortgage Prices

Although you can potentially wait out the rising home prices, rent prices have also gone up. So you’re still going to be paying someone’s mortgage, but it won’t be your own.

Nationwide, the median rent is at a historic high of about $1,575 as of June 2021. This number is up 8% from last year. Due to low inventory, renting isn’t an escape from paying high prices. That’s money that you’ll never see again once you pay your monthly rent. Whereas, if you choose to buy a house, your mortgage payment will contribute to owning the home.

Plus, your landlord can raise the rent if they please. But your mortgage payment remains the same, which protects you and your finances from the rising cost of housing.

Pro: Is The Housing Market Going to Crash?

The short answer is no. The market is not bound to crash in 2022. Although home prices did dramatically rise before the last crash, the prices were only a symptom of a more significant problem. Because lenders were giving out high-risk mortgages to homebuyers with poor credit history, this allowed more people than ever to purchase homes.

Prices are rising at the moment because people want homes. But, even if they are well-qualified to become homeowners, there aren’t enough properties available.

If you find an available home, it could be a great idea to jump on it! Of course, every local market is different, but overall, don’t expect a crash coming in the next year. Instead, plan for the new year with a homebuying strategy.

Con: Low Inventory

Because the number of available properties is extremely low, this creates a higher rate of bidding wars which drives up home prices. Thus, being able to afford an available home is more difficult. And you may have to submit multiple offers before your offer is chosen, which can be demoralizing.

It’s a seller’s market right now, so bidders are going above the asking price. So if you’re hoping to buy a new home this year, you will have to pay that higher price.

Con: Competition From Cash Buyers

Another challenge facing home buyers this year is the rise of cash buyers.

These cash offers are tempting for home sellers due to the definite sale, swift closing, and other perks compared to mortgaged offers. So mortgage offers face much more of a challenge in securing a home.

However, that doesn’t mean it’s impossible to buy a home with a mortgage. There are several different ways to compete with a cash offer, like getting approved for your mortgage, waiving contingencies, increasing your deposit, offering above the asking price, and including an appraisal gap guarantee.

You can utilize these strategies to secure a home, but a cash offer might still beat your home loan at the end of the day. So be prepared for intense competition with cash buyers and consider this route for yourself to buy a home this year.

Con: Potentially Tougher Mortgage Standards

During the pandemic, mortgage lenders raised the bar for home buyers due to increased financial risks.

Because lenders wanted to see higher credit scores, larger down payments, and cash reserves to qualify for a mortgage loan, buying a home is more challenging for many potential buyers.

Although these standards have relaxed as the pandemic wanes, mortgages still aren’t as easy to receive as they were in the earlier months of 2020.

Plus, some sellers these days are less likely to accept certain loans, so if you’re planning on using a specific type of financing, getting a reputable real-estate agent and loan officer can potentially help.

Personal Financial Factors to Consider

When planning to buy a home in this current market of high demand and low supply, there are several personal financial factors to go over. Let’s explore each of these factors so you can plan and find out if buying a home this year works well with your current financial situation.

Buying Sooner Creates Equity

Buying a home in this seller’s market allows homebuyers to take advantage of home price growth. According to the Federal Housing Finance Agency (FHFA), prices have risen 18.5% in the past year. This rise in price gave homeowners great profits when they decided to sell. So buying now would allow you to capitalize on this growth while building up your equity much faster.

Consider Your Budget

Although you can’t control everything during your home buying journey, you can control the price of your offers. One thing to consider is how high you’re willing to go in terms of your budget.

Calculate your expenses and savings to determine the maximum price you can afford to put towards a home. Set a budget from the start and stick to it when making your offer.

Having a stable income makes all the difference in being financially secure before buying a home. Lenders want to see consistent employment history to ensure that homebuyers have enough finances coming in to cover the mortgage cost. The majority of lenders ask for your last two years of W-2s. Some lenders also require your pay stubs up until closing.

If you’re self-employed, the lender may ask for your tax returns from the past two years as well as any 1099s you may have received.

Although lenders can’t forecast your finances, they need to see proof that you’ve been steadily employed and can continue to have a stable income.

Do You Have Debt?

Ensuring you can afford your monthly mortgage payment while also paying off debt is the next big step in deciding whether you can buy a house.

Calculating your debt-to-income ratio (DTI) will provide you with the likelihood that you would be able to make your monthly payments along with any current debt in comparison to your monthly income.

Typically, your DTI includes student loans, car payments, and any credit card debt. However, it won’t include living expenses like food, gas, and utilities. Although DTI levels vary by the lender and mortgage type, most lenders are looking for a DTI of less than or equal to 43%.

But the lower your DTI, the better. If you calculate a higher percentage, begin paying down your debt before entering the real estate market. To find your DTI, add up your monthly debts and divide that number by your total monthly income after taxes. Then, multiply that number by 100 to get your percentage.

Look at Your Savings Account

Your savings account is another important factor in home buying. Lenders want to verify that you have enough savings to cover the upfront costs of buying a house. So, how much should you have in savings for this part of the process?

Make sure you have enough in your savings account to cover the down payment and closing costs. Typically, a down payment can be from 3.5% to 20% of the home’s purchase price. Meanwhile, closing costs can add 2-5% of the home’s purchase price.

Your lender will also want to see enough savings to cover future mortgage payments and emergency expenses. A good rule of thumb is to save enough for your down payment, as well as three to six months of savings to act as an emergency fund.

This money can come in just in case you lose your source of income during the final stages of the homebuying process. Your savings can cover costs in the meantime until you can get a stable income going again.

Check Your Credit Score

When determining how risky of a borrower you may be, lenders will use their own credit scoring systems. For example, in 2020, a good credit score was considered to be in the high 600s or the low 700s. Now it’s increased into the mid-700s and even higher.

Before embarking on your home buying journey, check your credit report through a free credit score website or look it up in your credit card account. Because the pandemic has made lenders much more cautious, check your report carefully for any inaccuracies that could affect your credit score.

Consider Your Lifestyle

When buying a home, you must be committed to the property in the long run. More specifically, make sure that you’re planning to stay in the home for an extended period. If you’re unsure, consider your long-term goals with the property and why you’re looking to buy.

With the financial costs of buying a home, you want to ensure that this is an investment that will last at least a few years after buying. If you plan to sell in the future, keep in mind that it could be difficult to sell depending on the market.

Consider Your Local Market Conditions

When trying to pinpoint the best time to buy a home, you’ll need to pay attention to the local real estate market conditions. For example, if you’re browsing homes in a highly desirable neighborhood, you might find fewer available properties and high demand once a home hits the market. This will mean higher home prices for you as the buyer.

However, just because home prices might be higher doesn’t mean you shouldn’t buy a home. If your local market is hot, you might see rising prices over the years ahead. This will make your home an investment that will pay off well in the future. Whereas buying a house solely based on affordability may not be a bargain if the price of homes in the neighborhood remain static or even decline over time.

How to Decide If You Should Wait or Not?

If you’re still not sure whether you should wait on buying a home or not, the best decision depends on your budget, employment situation, and location. So, buying a home right now is the best choice if you meet at least one of the following conditions:

* You have a budget that can pay above the asking price

* You can pay cash for your home purchase

* You live in an area where demand for homes is low, and prices are manageable

* You work from home and have the flexibility in your schedule to move to a lower-cost housing market

* You’re willing to consider buying a home that will need work done

* You live in a hot area that is likely to appreciate

If you’re determined to buy a home this year, there are strategies to implement. However, if you fall under one of these categories, it might not be the best move to buy right now.

* You need to stretch your budget much more to afford the prices on the market

* You would have to buy a home that doesn’t meet your needs or is too expensive

* You can’t qualify for a good mortgage rate, which would mean paying more for the home in the long run

The home prices may cool off at some point, so it might be best for you to wait out this real estate boom for now. The competition will eventually dwindle, making it easier to buy a home and stay within your budget.

How to Prepare to Buy a Home

Even if you’re not ready to buy a home right now, there are several ways you can prepare for your future purchase.

The first preparation move you should make is getting your finances in order. The more prepared you are with financing a home, the less stressful the buying process will be for you.

Take this year to improve your credit score, save money for your down payment and closing costs, and calculate your DTI ratio to stay ahead of the game. Meeting with a mortgage advisor can also help you as a buyer to fix certain issues that may be holding you back from qualifying for your ideal home.

The next move is to interview realtors in your area. However, don’t pick the first person that comes up in your online search. Every realtor varies in experience, expertise, and unique skills, so it’s wise to find several options so you can speak to all of them separately.

You should be able to communicate well with your selected realtor and trust them to guide you through the home buying process. Get to know your realtor through speaking with them, reading their reviews by other clients, and ensuring that they’re an excellent match for your needs.

If you’re looking to buy a home during today’s hot market, be sure to follow up on the tips above. Buying a home right now might not be for everyone, but it’s really up to your finances, budget, and local market to make that decision.

If you’re unsure about what to do, consult a professional like a financial advisor, a loan officer, a local real estate agent, or a tax advisor to get you started.

For first-time home buying advice, check out more from BHGRE HomeCity