Larsen: What potential homebuyers should do as the Fed looks to cut interest rates

Brian Larsen, WaFd Bank

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With news from Jerome Powell, the head of the Federal Reserve, indicating that interest rate cuts are coming sooner rather than later, there is no better time for consumers to start getting ready to purchase a home.

Buying a home is a daunting task, but there are tools at your fingertips that can ease the process such as utilizing your local bank loan officer. They can be your trusted adviser, helping you navigate the market and explore options that fit your budget.

Think of them as a free homebuyer tutor, helping prepare you so you are ready to buy when the time is right. The four primary areas of homework to focus on are budgeting, preparing for additional costs, getting your credit score up, and learning about programs designed to help you.

Budgeting

Typically, you’ll need at least 3% to 5% of the cost of the home for a down payment, so once you find the price range of the house you want, you can set up your budget to save enough for a down payment over time. A home is probably the most expensive thing you’re going to buy and there are a lot of costs that can add to the final price, but by sticking to a budget you can set a solid foundation so you’re ready to strike when interest rates drop and your dream home comes on the market.

Don’t forget about additional expenses

• Inspection and appraisal fees
• Property taxes
• Homeowner’s Association Fees: You will pay these if your new home has an HOA.
• Maintenance costs
• Insurance: Almost all lenders require borrowers to have insurance on their home. If you put less than a 20% down payment there is also Private Mortgage Insurance (PMI) which many lenders require to be paid on the loan, depending on the amount of your home loan compared to its value, also known as loan-to-value. The PMI you pay every month does not apply to the principle on the loan (the original amount you borrowed). If you want to avoid paying for PMI, ask your lender if they have exclusive or portfolio programs that do not charge PMI.

Get your credit score up

To qualify for a loan and get the best rates, you need a solid credit score. The higher your score, the better your loan rate. Raising your credit score takes time, which is why it’s a great idea to start working on it well ahead of when you plan to buy a home. To help increase your credit score, consider the following steps:

• Review your credit report: Ask your loan officer about ordering a free credit report from annualcreditreport.com. Review your outstanding credit accounts with an experienced loan officer to help improve your overall credit.
• Pay your bills on time.
• Don’t use too much credit: One third of your credit score is based on credit utilization, which is how much credit you have available compared to how much you use. So, if you have a $10,000 credit limit on your credit card and have $2,000 in charges, your credit utilization is 20%. You want to keep this percentage as low as possible.
• Make sure you have a credit card: Using a credit card responsibly can improve your credit score and helps to build a good payment history.

Learn about programs designed to help

An affordable home is the gateway to long-term and short-term financial success. Long-term, you’ll build equity you can use in the future. In the short-term, you’ll be able to enjoy potential tax deductions (consult your tax advisor) and pay yourself instead of paying rent. Homeownership can seem more challenging for low to moderate income families. However, there are many programs designed to help make home ownership a reality.

No matter which program you choose to use, they are all beneficial and can help get you into your new forever home.

Editor’s note: Brian Larsen is Northwest Arizona division manager for WaFd Bank. Reader reactions, pro or con, are welcomed at AzOpinions@iniusa.org.