Is 2015 the year to buy a home? That's the big question as we head into the spring homebuying season, and unfortunately, there's no easy answer.
For years, analysts have been saying that interest rates are headed up -- that there is, in fact, nowhere for them to go but up. But they've instead held low for much longer than expected -- and will likely continue to hold for some time, says Greg McBride, CFA, Bankrate's chief financial analyst.
"Mortgage rates are currently below 4 percent, and as long as there is enough uncertainty regarding the global economy to keep the Fed from raising short-term interest rates, we're going to see mortgage rates remain very low," McBride says. "But even when that uncertainty dissipates and the Fed does raise short-term rates, mortgage rates are unlikely to shoot higher -- they're still going to be at very attractive levels for some time to come."
Those continued low interest rates, though, are just the tip of the iceberg. There are several other reasons why 2015 is looking attractive to homebuyers: Rents are up, making buying a more cost-effective option in many cities. Lending requirements have loosened, and there are more financing options available. The government lowered mortgage insurance premiums on FHA loans from 1.35 percent to 0.85 percent, saving the typical FHA borrower around $80 a month, according to CoreLogic. And, Fannie Mae and Freddie Mac have agreed to back loans with as little as 3 percent as a down payment, allowing more first-time buyers into the market.
If all of that has you considering jumping in, here's what you need to know.
Put yourself in a good position
"What we've seen so far, in terms of home sales, is that in a lot of markets home sales are up. In some markets, the inventory is tight," says Rob Chrane, president of Down Payment Resource, which helps homebuyers find money for down payment assistance. "We're seeing millennials and other first-time homebuyers starting to consider looking now."
To put yourself near the front of the line, you need to stay up on the inventory -- which means finding a good agent -- and get preapproved for a loan so you have that in your back pocket when you're ready to make an offer. That way, you'll be in a position to move quickly if your dream home comes along.
"People often go out and look first, before knowing what they can and should be looking for," Chrane says. "Why go out and look for homes and get excited when you don't know what you can afford?"
My rule of thumb: Your housing -- and that includes mortgage, homeowners insurance, property taxes and maintenance -- should not exceed 35 percent of your take-home pay. Bankrate has a calculator that can help you figure out how much house you can afford.
Be sure you also have a cash cushion above and beyond what you need to purchase (and furnish, and potentially renovate) the home, McBride says. "What a mortgage lender is going to look at is whether you have enough cash to make six months' worth of mortgage payments. But in terms of you being able to sleep at night, you're going to need a lot more cash than that -- your destination is six months' worth of expenses."
Your credit still matters
Yes, lending standards are a little looser than they were immediately after the recession. But to really take advantage of these low interest rates, you'll need strong credit -- most mortgage lenders want a score of 760 or above to give you their very best. Before setting off on your home search, pull your credit score. I recommend borrowers pull their FICO and their VantageScore.
Then get your paperwork in order -- you'll need to show several years' worth of documentation to prove your income and your assets, a feat much harder for small-business owners, says McBride. "People who are small-business owners, or subcontractors who work for themselves, are going to need to show a demonstrated track record of income." Plan to use a family gift as a down payment? That will likely need to be documented as well, with a certified letter that states it is not a loan.