Get ready to buy in 2025
2025 is shaping up to be a pivotal year for homebuyers. The higher mortgage rates of 2024 seem to be fading away as rates have been coming down through the fall. That’s great news for buyers who have been waiting on the sidelines for homeownership to become more affordable, particularly first-time homebuyers.
In addition to lowering mortgage rates, the number of homes for sale has been increasing. One of the major problems in the housing market over the last few years was that there weren’t enough homes for sale to match the number of homebuyers out looking. With this increase in home listings, that should become less of a problem.
This means that buyers will have more choices and won’t have to feel as rushed to beat out the competition for fewer homes. It also should help keep home prices from rising.
How the market might change in 2025
But all of this good news carries a big caveat: an improving housing market means more people will be looking to buy. That means more competition, as more buyers are enticed to start looking for homes due to the lower mortgage rates. And that could mean that the existing inventory of homes for sale could quickly evaporate. If that happens, there won’t be enough homes to match the demand and it will become a much more difficult environment in which to buy a home, resembling the seller’s market of 2021 and 2022.
Whether you’re a first-time buyer or looking to upgrade in 2025, preparation will be key. Here’s how to get everything in order before the year’s end to make your homebuying journey as smooth as possible.
Usually, our first piece of advice would be to start your home search by getting pre-approved. But since we’re talking about buying a home next year, you have a little more time and can start getting your financial situation in order before a pre-approval.
1. Give yourself a financial checkup
When you’re beginning your home search, you should start by evaluating your financial situation — income, savings, debt and spending habits. How comfortable are you with the idea of putting a down payment on a home and paying a monthly mortgage? Keep in mind that if you’re renting, you can replace your rent with your mortgage payment.
Use our affordability calculator to get a better understanding of how homeownership could fit into your budget.
2. Improve your credit score*
Your credit score is one of the most significant factors lenders consider when offering mortgage rates. You can reach out to any of the three credit report bureaus to find our your score for free – Equifax, Experian or TransUnion. Your score is given in a range of 300 to 850. Most lenders prefer to see credit scores above 720 and may penalize you with a higher rate if your score is below that.
Start by checking your credit report, addressing any errors and working on paying down existing debts. Since credit takes time to build, starting early will put you in a strong position to begin the new year.
3. Manage your credit usage
In addition to paying down any existing credit card debt, you should also try getting into healthier habits with your credit cards. Aim to pay off new charges in full each month. Try to keep your credit utilization lower than 30% of your total credit available as high balances — even if paid monthly — can temporarily lower your score when lenders check.
Whatever you do, don’t open new lines of credit, like store cards, before applying for a mortgage. New credit accounts can lower the average age of your credit and suggest financial strain.
4. Build up your savings
The more you can pay as a down payment on your home the lower your monthly mortgage payment will be. So aim to save up for a larger down payment between now and the time you make your offer.
Start by spending less and saving more. Consider placing funds in a high-yield savings account to maximize returns before buying. Don’t forget closing costs, typically 2-4% of the home’s price. Paying them up front is cheaper than rolling them into your loan and some programs may help cover them.
While 20% down payment is considered standard, it is by no means necessary or even that common. If you need help, look into assistance programs or other funding options.
5. Get your documents in order
Having all your financial documents ready is essential for a smooth mortgage process. Lenders will likely ask you to provide the following documents during the application process:
- Proof of income
- Evidence of assets
- Contact information for your real estate agent, lawyer, inspector and others
- Tax documents, including W2s and tax returns for multiple years
- Information about past employers
Having these documents ready will cut down on delays and make it easier to submit your application so that you can move quickly.
One way that you can keep your documents ready to share is with the Rate App. The app puts our Digital Mortgage at your fingertips at all times so that you can provide the necessary information that your Loan Officer needs as soon as it’s requested. You can download the Rate App for free.
6. Calculate how much home you can afford
Understanding what you can afford is crucial to avoiding future financial strain. Take a close look at how much of your income goes to essentials like housing and debt. Ideally, your debt-to-income (DTI) ratio should stay under 36%, with housing costs alone comprising no more than 28% of your income. Our affordability calculator will help you create a homebuying budget.
7. Keep an eye on interest rates
Mortgage rates have been fluctuating but overall, they’ve been decreasing over the last few months. Many experts believe there’s a good chance that they may come down even further in 2025. As rates begin to drop, you’ll want to act quickly to secure the best deal. That’s why it’s so important to have a relationship with a local lender. They’ll be able to tell you when it’s time to lock in a rate.
8. Get pre-approved
Being pre-approved for a mortgage demonstrates to sellers that you’re a serious buyer. Pre-approval gives you a clear picture of what you can afford and can also expedite the process when rates drop, ensuring that you’re ready to move fast.
Not all pre-approvals are the same, however. PowerBid Approval from Rate is a fully underwritten credit approval that can compete with cash offers. You can lock in your rate for 90 days and it’s renewable. It’s fast too, with priority turn times to help you become a power buyer overnight. Start your search with PowerBid Approval.
Get a head start on 2025
All indications are that the market will be competitive, especially if mortgage rates decline further next year. There will likely be more people looking to buy next year and there’s a possibility that the number of homes for sale will come down. By following these steps, you’ll be able to stay ahead of market conditions and in a prime position to secure your dream home in 2025.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
* Rate does not provide credit counseling or credit repair services.
