A Millennial’s Guide to Buying a Home
Buying a home is like competing in a mud run, naked while planning a wedding at the same time. It’s taxing, it will make you feel vulnerable, it has its ups-and-downs, and it isn’t always fair. But – for those willing to take the plunge, bare their financial assets, and compete for their own backyard – home ownership is one of the most rewarding financial achievements of a lifetime.
Most prospective home buyers have a ton of questions:
- Do I need a 20% down payment to buy a house?
- What should my credit score be to buy a house?
- Should I get pre-approved, or pre-qualified? And which is better?
- Do I really need a Real Estate agent to buy a home?
- Are mortgage interest rates going to rise?
We answered those questions and provided the prospective first-time home buyer with a step-by-step guide to assist in purchasing a home. All while dispelling a few common myths associated with the process.
The Down Payment – Do I need 20 percent to buy a house?
The down payment is often the ultimate hurdle in your path towards homeownership. One doesn’t need a sizeable down payment to buy a home. Nowadays, federal, state, and local down payment assistance programs (DAPs) are available to the first-time homebuyer. These programs make it possible to put as little as 1% down when buying a home. Keep in mind, not everyone qualifies for down payment assistance, but it is worth investigating.
Now don’t start jumping on Zillow to find that dream home quite yet. It’s important to understand how the amount of money, in terms of the down payment percentage, ultimately affects the cost of a loan. Generally, the more money someone can commit up front, the more likely the overall cost of the loan will be lower.
When one can commit to a sizeable down payment (20 percent and above), it is a sign of commitment to the property in question and an early indicator of one’s likelihood to default. There is “skin in the game” so to speak. To the lender, it means not having to protect their investment (your loan) as much by way of higher closing costs and/or interest rates.
This is where a qualified, knowledgeable mortgage professional becomes the prospective home buyer’s new best friend. A good mortgage professional (a.k.a. Loan Officer) can review your finances, the desired property/location, and associated costs to recommend the most cost-effective path to homeownership for you to reach your future financial goals.
For example, Land Home offers House2Home, a government grant that can be used towards a down payment and/or closing costs. The best part about the House2Home’s grant is it doesn’t have to be repaid if all the qualifying terms are met.
When buying a home: Step 1 – Select a qualified, knowledgeable loan officer and develop a down payment savings plan.
*Myth 1 – Only low-income individuals can qualify for down payment assistance programs. Down payment assistance programs are for a variety of individuals who meet various qualifying standards. These programs are designed to make homeownership possible for all who meet the qualifications and are able and willing to try.
Credit Scores – What should my credit score be to buy a home?
Credit scores are a numerical representation of one’s ability to pay their bills and other financial loans on-time and on-schedule. Essentially, your credit score tells a lender if you have a track record of responsible borrowing – whether it’s for a television, a car, a home, or a service such as medical care. If you have a track record of late payments and credit defaults, this behavior will be reflected in your credit score telling future creditors – “be careful with this borrower, they don’t pay their bills on time!”
When applying for a home loan, your credit score has a direct effect on the interest rate of your loan. Generally, the lower your credit score the higher your interest rate; the higher your credit score the lower your interest rate.
While you don’t need a high credit score to purchase a home, generally a higher score will help keeps your mortgage costs lower than if you were to have a lower score.
Buying a Home: Step 2 – Check your credit report monthly and look for any errors or possible enhancement opportunities.
*Myth 2 – Credit scores take years to improve. According to the Federal Trade Commission (FTC) 1 in 5 Americans have errors on their credit reports. Simply fixing errors on your credit report can sometimes make a significant, positive impact on your overall score. In addition, paying off specific debt and/or seeking debt forgiveness can sometimes move your score up enough to save money on a home loan.
Pre-Qualified vs. Pre-Approved – What’s the difference and which is better?
Most mortgage lenders offer prospective homebuyers two different options when it comes to their commitment to lend – a Pre-Qualification letter and a Pre-Approval letter.
A Pre-Qualification letter is simply a document stating you have submitted the necessary financial documentation (usually the last two years of W2s/Tax Returns, recent Bank Statements, and your Driver’s License) for review and you “qualify” for the requested loan amount.
Essentially, the mortgage lender collects your financial documentation, reviews the information provided on the documentation and provides the customer with a written document (letter) stating, based on the face value of the submitted documentation, the customer has pre-qualified for the requested loan amount.
The pre-qualified amount is based on the customer’s perceived debt-to-income ratio (DTI), their financial assets, and credit score.
On the other hand, obtaining a pre-approval letter will take the pre-qualification process a few steps further. The mortgage lender collects the prospective home buyer’s financial documents (W2s/Tax Returns, Bank Statements, credit report, driver’s license, etc.) and instead of accepting them at face value, the mortgage lender takes them through the underwriting process. The purpose of this extra step is to validate the information in the documents beyond their face value.
For example, an underwriter will contact your bank and request verification of the funds indicated on your bank statements. They will also look back through your credit history to confirm the score is accurate and up to date with no pending negative actions. It is essentially the underwriter’s job to validate the prospective home buyer’s financial health and confirm they have the assets to repay the loan both on time and with no financial hardship.
In a competitive home buying market, as we are in today, home sellers want to see a Pre-Approval letter before accepting an offer on their home. The reason is that a lender’s Pre-Approval letter is basically one step away from a full fledge loan commitment and usually translates into a quick and straightforward closing process.
Buying a Home: Step 3 – Get Pre-Approved!
*Myth 3 – A low rate is the most important factor when selecting a lender. A low rate is nice, but don’t dismiss the value of having a qualified, knowledgeable Loan Officer assisting you to select the best loan package for your situation. Many factors go into the cost of your loan and poor choices up front can cost you a lot in the long run.
Real Estate Agents – Do I really need one to buy a home?
A qualified, experienced and reliable Real Estate Agent can often be the difference between getting your dream home or not. However, we will be the first to tell you – not all Real Estate Agents are created equal. Do your homework, and interview at least three different Real Estate Agents before selecting one.
You are looking for an individual, or team, who is willing to “go to bat” for you and your dreams of buying a home. They should have past client references, insider knowledge of the local purchase market, and have a large network of local Real Estate Agents they work with. They should be a natural negotiator who is willing to do whatever it takes to help you purchase your dream home.
Often, Loan Officers will have plenty of Real Estate Agent references they can share with you.
Buying a Home: Step 4 – Select your desired neighborhood and hire a qualified Realtor/Real Estate Agent.
*Myth 4 – A Realtor and a Real Estate Agent are not the same things. Both the Real Estate Agent and the Realtor are individuals who can legally represent buyers and sellers in a home purchase. A Realtor however, has the full backing of the National Association of Realtors. While we won’t say one is better than the other, we will say working with a Realtor provides the customer the security of knowing the agent they have chosen, answers to a National Association in terms of ethics, educational standards, and legal backing.
Mortgage Interest Rates – Will rates go up?
“What’s the rate today?” is every lender’s favorite question – NOT! Why? Well… there’s no simple, straight-forward answer to the question. As mentioned before, many different factors affect mortgage interest rates.
There is however, a baseline rate for mortgages and it usually comes in the form of the conventional 30-year fixed rate. Due to strict qualifying standards, this is the mortgage option least affected by the factors mentioned earlier, such as credit score, down payment amount, and DTI.
For informational purposes, most experts are predicting an increase in the base rate for a conventional 30-year fixed mortgage. This isn’t surprising given the historic lows mortgage rates experienced in 2015 and 2016. Again, while many factors affect mortgage interest rates, according to the Mortgage Bankers Association (MBA), the baseline rate for a 30-year fixed conventional mortgage is expected to increase to 4.6 percent in 2018, 5.0 percent in 2019 and 5.3 percent in 2020.
Buying a House: Step 5 – Develop a sense of urgency to achieve your home ownership goals. Why? Home ownership is predicted to get more expensive.
Myth 5 – A prospective home buyer should go with the lender who advertises the lowest rates. A low advertised rate is just that – an advertisement. The interest rate a prospective homebuyer obtains is the rate they “lock” with their Loan Officer after all of the previously mentioned contributing factors have been worked into the equation.
A Fantastic Year for the First-Time Home Buyer to Purchase a Home
It is getting easier than ever to qualify for a mortgage which is due to several factors: Mortgage Lenders have begun accepting lower down payments, the debt-to-income ratios (also known as DTI) used to qualify for most mortgages became more forgiving last year and future home prices are expected to level off.
Our Advice to a Millennial First-Time Home Buyer…
Don’t delay! Follow our step-by-step guide and you’ll be one step closer to making your home ownership dreams a reality. If you wait, you will more than likely end up paying more for that same home.
If you don’t care for step-by-step guides, simply use our Find a Branch tool located on our website to find a local Land Home mortgage professional in your area. Our local mortgage professionals will walk you through each step of the home loan process and be your champion along the way
Best of luck and happy house hunting!
*Please note all pricing, percentages, and fees are subject to change and are based on personal circumstances. The use of hypothetical, predictive, and forecast statements, by Land Home Financial Services and noted third parties, is meant to illustrate possible outcomes and is not intended to be a statement of facts nor an endorsement of validity.
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