We’re all familiar with the many benefits of building your own home -- custom layout, design, and features; the ability to choose a reputable builder you trust; not having to deal with unexpected issues and repairs for a while; and the latest energy-efficient construction practices and tech implementations, to name a few. Still, many prospective home buyers view building a home as a pipe dream that will happen down the line when all the stars of life align.
But here’s the thing: if you’re planning to build eventually, it’s smart to never let an opportunity pass you by without considering if now is the right time. So today, let’s assess whether 2020 is the right year for you to take a step forward in your home-building goals.
Assessing Your Personal Financial Readiness
Assessing your personal financial readiness is the first step to assessing whether 2020 is the year for you to build. Nerdwallet recently released an article featuring practical steps to home buying in 2020. Let’s start by highlighting a few of these through the lens of building your own home.
Getting Pre-approved for a Loan and Exploring Mortgage Options:
Because the housing market can be quite competitive, the first step for many homebuyers -- even before exploring the market for homes they may want to make an offer on -- is to get pre-approved for a loan. Pre-approval means that when you do find the right house, you can move quickly.
Fortunately, this is an area where building new versus buying old offers yet another advantage: because you’ll be working with a builder to create a vision, the process is more collaborative and less transactional from the get-go. In other words, your builder is on your side and can help you identify the mortgages, lenders, and payment plans to make your home vision a reality while keeping your wallet happy.
Start by contacting your builder’s preferred lenders to learn how the process works and where your personal financial readiness is. For those who prefer to gather more info before beginning the process, some builders offer a simple mortgage calculator to get an idea of what your monthly principal and interest payments might be. But remember -- you and your builder are in this together. Your builder and their partner lenders want to see your goals succeed and will help you navigate the process, so don’t hesitate to start the conversation to see what’s possible.
What’s My Credit Score, and What Does It Mean for My Mortgage?
When it comes to calculating your loan, there’s actually a lot more to it than just assessing your credit score, though that is also important. While every lender is different, you’ll typically need a minimum FICO score of 620, with home buyers’ average credit being between 620 and 680. And if you don’t know what your credit score is at the moment, don’t worry. There are several options that allow you to check it for free.
Income, Debt-to-Income Ratio, and Down Payment Amount
Remember how we said there’s a lot more to assessing your mortgage options than just your credit score? That’s where the items listed above come into play. Your total annual income, along with your ratio of debt to income and the amount of money you have saved for a down payment, dictate the size of house you can afford and the amount of money/interest you can expect to pay your lender on a monthly basis.
While the only way to get an accurate idea of where you stand is to talk to your lenders about your options, it’s interesting to note that you can roughly calculate your budget for buying a home as three times your annual income; currently, mortgage rates around 4% APR are the norm (and that’s good for buyers!); and while 20% down has long been held as the ideal (and it does give you an advantage), you can procure loans for much less. In fact, 6% down was the median for first-time home buyers in 2019.
Note that down payments and loan options are different for home building than home buying and that every home builder’s partner lenders will have different options. So again, initiating a conversation is the best place to start.
Assessing the Wider Market Readiness
Now that you know a little more about where you stand in terms of your personal financial readiness, it’s time to assess what’s happening in Delaware. While there’s been a lot of talk about a potential recession in 2020, Zillow reports that as 2019 progressed, this seemed less and less likely. Perhaps the economy has slowed down, but this could be a hallmark of stability rather than a negative sign.
What does this mean for those who are considering building a home in 2020? There are many ways to interpret ups and downs in the market, and of course no prediction of market health is ever 100% reliable. That said, a slower market generally means a healthier and more stable one, so buying or building new could be less of a risky investment. Zillow reports that home values in Delaware went up by .9% in 2019 and predicts that they will rise by another .2% in 2020. This appreciation isn’t dramatic, but as we said above, that’s not a bad thing for buyers.
Getting in on Your Desired Location and Builder
Personal finances and market health aside, another important consideration for prospective home buyers in 2020 is whether their ideal location and builder are available. “Location, location, location” applies to building new as much (if not more) than buying old, because, especially in a very hot housing market like Delaware, space is limited. So if you see a location you like, don’t assume it’ll still be available next year.
Just as important is your preferred builder’s availability. It goes without saying that your satisfaction with your newly-built home will be directly linked to your builder’s integrity, reputation, building practices, etc. So while you do need to wait for the time that’s right for you, don’t forget to ascertain the time that’s right for youe builder as well. As with everything we’ve covered, building a new home is a collaborative process, so let’s talk.