It is most Californians’ dream to one day own their own home in California. However, if you buy before you are ready, your home can quickly drag you down and make you house poor, meaning you owe more on your property than what its estimated worth is. You want to buy a home. Eventually. But timing matters when it comes to such an enormous and potentially life-changing purchase.
This begs the questions: When is the best time to buy a house in California? Does such a moment exist when all lights turn green, guaranteeing this is a decision you won’t regret? It is important to buy a home for the right reasons, when you are ready, and not just because it is expected.
Use your rent as a mortgage guide
The tax benefits of home ownership in California generally allow you to afford a mortgage payment, including taxes and insurance, of about one-third more than your current rent payment without changing your lifestyle. Multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment. So, if your rent is $1,500 per month, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership. However, if paying rent is straining your finances, buy a home that will give you the same payment rather than going up to a higher monthly payment. Always remember homeownership has added overhead that your landlord now covers, like property taxes and repairs. If there’s no room in your budget for those extras, you could become financially stressed.
Not having 20% for a down payment
A 20% down payment is ideal; a homebuyer in California will immediately gain equity in the home, and will enjoy lower monthly payments. However, not all buyers are able to save 20% to buy a house—especially young adults in entry-level roles. They may not realize that there are many options that don’t require the full 20% down payment; however, those options come with their own pros and cons. For example, it’s possible to put 5% down, get one loan for 15% and a second for 80%. But those who put down less than 20% may be required to pay mortgage insurance—yet another monthly expense to add to a home buyer’s budget.
My credit history is poor or nonexistent
Helping you score a better interest rate, your credit certainly is very important. However, a rocky credit history does not completely prevent you from home ownership. If you have been paying all of your bills on time, keep it up! If you haven’t, now is the time to make the adjustment so when you do go to buy a home, whether that is in a month or a decade, you will be in a position to buy.
Keep in mind that the length of time you have established credit is almost as important as paying bills on time. Be sure to keep your oldest credit card open even if you no longer use it. You want your credit history to be as long as possible. Be willing to provide basic information your lender needs such as income, debts, and obligations such as child support or a student loan.
Come clean about any problems you think you may have getting a loan. If you weren’t so great at paying bills while you were in school, you may have hurt your credit rating. Tell the lender that you may have possible derogatories and what you’ve done to repair the damage. Start a conversation with a lender now to see what your options are to improve your credit situation.
Finally, do not take on any new debt if you are thinking of making a home purchase soon. Wait until after you’ve settled on your new home.
Time of Year
If finding the most homes listed for sale at once is what you’re looking for, spring is the time to shop and make an offer. March through May, one in four US homes listed sell above initial list price—higher than at any other point in the year. This pattern is consistent throughout the US market. Many real estate agents argue it’s better to buy a new home in the spring and summer when inventory is high, but there are benefits to waiting until the market dies down.
Competition that stresses buyers in spring returns to squeeze sellers in the summer. Concerned about back-to-school, colder temperatures, and holidays, factors that annually signal the end of the spring to summer home shopping season, sellers want to close the sale rather than re-listing and trying again next year. This leads many sellers to reduce asking prices in late summer and early fall in hopes of finally attracting a buyer.
The quietest time of year in the real estate market is mid-fall through mid-winter. The four slowest months of the year in real estate are November through February. Between the cold and Holiday season this is understandable. Buying or selling a home in California at this time is often challenging. Real estate professionals are also more eager in the slower winter months. Being paid on commission, realtors and mortgage brokers are more dedicated to make each deal happen during this period of the year. They’ll also have more time and resources to spend on each individual sale.
Prepare a detailed budget
Traditionally, you can typically afford a home priced two to three times your gross income. Which means, if you earn $100,000, you can typically afford a home between $200,000 and $300,000.
It’s not the best method because it doesn’t consider monthly expenses and debts. Those costs greatly influence how much you can afford. If you earn $100,000 a year but have $1,000 in monthly payments for student debt, car loans, and credit card minimum payments, you won’t have the same funds to pay your mortgage as someone earning the same income with no debts.
Prepare a budget that tallies your ongoing monthly bills for all expenses: credit cards, car and student loans, lunch at work, day care, date night, vacations, and savings. See what’s left over to spend on homeownership like your mortgage, property taxes, insurance, maintenance, utilities, and community association fees, if applicable.
Golden State Mortgage Can Help
At Golden State Mortgage, we are a California based mortgage company, and specialize in FHA home loans for first time home buyers. FHA loans are a great option for first time home buyers and if this is your first home purchase then a California FHA home loans are probably your best option due to the low down payment and easier credit standards. Your down payment can be as low as 3.5% of the purchase price, and closing costs and fees can be covered by the seller. Call Golden State Mortgage today at 1-888-502-2136 or fill out the quick contact form to speak with a California FHA loan consultant and get a free good faith estimate.