While it’s certainly not true for home owners struggling with depreciated home values, today’s housing market has presented the opportunity of a lifetime for first time home buyers.
Yet thousands of potential buyers have taken themselves out of the market before fully understanding if they can buy and if so, what they can afford.
And what renters may be surprised to know – buying is a better buy then renting. According to the NAR, rents have steadily risen and are likely to accelerate this year which is the exact opposite of home values.
While financial fears often stop renters from the American dream of homeownership, lack of knowledge about mortgages, credit and the process are proving to be the biggest roadblocks to becoming a first time home owner. My worry is that by the time these first time home buyers realise how to capitalise on the current market opportunity, their dollars won’t go as far.
Consumers get a failing grade when it comes to understanding credit. A recent credit-knowledge study by the Opinion Research Corporation and MortgageMatch.com found that only 60 per cent answered the questions correctly. Most didn’t know where to find their credit scores, what constitutes a strong score, or the financial cost of a poor score.
Even more concerning, 30-five per cent of successful buyers recently said they didn’t know their credit score when they went house shopping. Getting educated on credit is easier than many think and is critical to making the “move” to becoming a home owner.
It’s crazy to think that just a few simple steps to better prepare could greatly improve a buyers’ chance of getting a mortgage on favourable terms. The window of opportunity for first time home buyers won’t last long. My team has created a checklist to help renters get into the market before listing prices normalize and increase.
- Pay down debt. Before you apply for a mortgage, reduce your total debt to help reduce your overall debt-to-income ratios and improve your credit score. Generally, your ratio should be 36 per cent of your gross monthly income. Also, the total of your housing expenses alone, whether you are renting or buying, should not exceed 28 per cent of your monthly gross income.
- Clean up your credit. About half of all renters think they don’t have good enough credit for a mortgage, but most don’t really know. Obtain your free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them, noting all negative items. Contact creditors to correct inaccurate or outdated items. It will take time, but you need to raise your credit score to a minimum of 680 and ideally to 720 and above to qualify and to avoid being penalised with a higher rate of interest.
- Make no new large purchases and don’t apply for new credit before or during the period that you are applying for a mortgage all the way up to closing. Lenders check credit reports at the time of an application and again right before closing. Last minute questions about your credit can cause a delay, a higher interest rate, or a denial from a lender. Wait to buy the new furniture until the house is yours.
- Increase your down payment. This will reduce the loan-to-value ratio and increases the likelihood of getting a loan and better terms from your lender. Increasing your down payment immediately increases your equity, reduces the amount you borrow and reduces your monthly mortgage payment. If you are in need of down payment assistance, more than 4000 local and state governments offer workforce house assistance for low to medium income buyers. Some require homeownership education, which can be very helpful.
- Gather documents beforehand. Don’t wait until the last minute to scramble for paperwork that supports your employment status, assets and credit. Have all the necessary documentation ready for review when you apply. Collect your income tax returns, pay stubs, bank and financial statements, and student loan paperwork.
- Anticipate closing costs. Closing costs, which can run 5- to 7-per cent of your total transaction, add up quickly and must be paid in cash — in addition to your down payment. Be prepared to have adequate cash on-hand.
- Determine the type of loan you need. Fixed rate? Adjustable? FHA or VA? Fifteen or 30-year term? Jumbo? Second trust? These decisions aren’t just financial. They also reflect your lifestyle, your risk tolerance and the programs for which you might qualify. Do your homework and make a decision before you go house hunting. Don’t let someone talk you into a different game plan to stretch your finances to afford a particular property.
- Ignore “bait rates”. Some mortgage advertising can be misleading with low rate promises. Beware. These “bait rates” are only for those with extraordinary credit with no contingencies. Your rate will be based on many factors: your credit, your debt-to-income and loan-to-value ratios, the size and type of your loan, where you live and the day you lock your rate, etc. You won’t know what your rate will be until your application is accepted. By then, it may be too late for you to find a competitive rate from another lender. Instead, pick a lender you trust, who will work with you and helps you find the best all-around deal.
- Negotiate a lower home sales price. Getting a better deal on your home not only works for you, it works for your lender because it lowers your loan-to-value ratio. Prices are still falling in many markets and sellers are eager to make a deal. If you’re not sure what a property is worth, you can ask your Realtor for a comparative market analysis.
- Have a cash reserve. A good rule of thumb is to have at least three months’ salary saved as a cushion before you buy. This will help with your ratios and enable you to afford and cover closing costs.
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