Category: Buying a Home

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Here are 3 major ways debt can affect your ability to buy a home

Debt can affect ability to buy a home.

Debt — and the way you manage it — can help or harm your ability to buy a home.

If you’re preparing to buy a home in the future, you likely have a laundry list of things you need to do to get ready — and that includes getting your finances in tip-top shape.

Aside from double-checking your credit score and credit report and making sure you have enough money saved up to purchase in your desired market, you should also consider the ways your current debt balance might affect your ability to buy a home.

1) It shows lenders you can handle paying back lenders

Having some debt on your credit report is still really important because lenders need “clues” about how good you are at managing different forms of debt. So having a student loan that you paid off on your credit report can be a green flag to lenders.

Or, maybe you’ve been managing two credit cards really well over the last five years; this is another positive trade line that will show up on your credit report and help you appear less risky as a borrower.

If you don’t have any history of managing debt — even one credit card — lenders may not feel comfortable giving you such a large loan because you lack those clues about your debt management habits.

2) Managing debt well can improve your credit score

Healthy debt management habits can set you up to have an easier time getting approved for your home loan. Not only do you have a history of managing debt, but you also have clues that point to positive management habits — and that can be reflected in your credit score.

Most mortgage lenders look for a credit score of at least 620. Some lenders, like Rocket Mortgage, may still consider applicants who have credit scores of at least 580 for some home loans. But the higher your credit score, the lower your mortgage interest rate will be. That’s why working to improve your credit score before you apply can work to your advantage.

Payment history makes up 35% of your credit score. So just by consistently making your credit card, auto loan, and other payments every month, you’re contributing to improving your credit score. Likewise, if you were to miss a payment, this could have a big impact on your credit score.

The amount of money you owe is the second most important factor in determining your credit score (it makes up 30% of your score). This is usually a measure of your credit utilization, which is the amount of money you owe in relation to your total credit limit. Experts typically recommend keeping your credit utilization below 30%.

So if you have $5,000 as a total credit limit and owe $2,500, your credit utilization is 50% and it would be a good idea to continue making payments so you can lower your utilization.

Because of that credit utilization rate, carrying too much debt could drag down your credit score. Coming close to maxing out your available credit makes lenders think that you’re spending beyond your means and would therefore be a risky borrower.

3) Having too much debt can make you ineligible for some home loans

One criteria mortgage lenders assess when reviewing your home loan application is known as the debt-to-income ratio. Your debt-to-income ratio is a comparison of how much you owe to how much money you earn. Your gross income (pre-tax income) is used to measure this number.

A lower debt-to-income ratio suggests that you have a healthy balance between debt and income. However, a higher debt-to-income ratio suggests that too much of your income is going toward paying down debt, and this will make a mortgage lender see you as a risky borrower.

According to a breakdown from The Mortgage Reports, a debt-to-income ratio of no more than 43% is considered good; a ratio closer to 45% might be acceptable depending on the loan you apply for, but a ratio that’s 50% or higher can raise some eyebrows.

A higher debt-to-income ratio could make you unable to be approved for some home loan programs with attractive features, like lower down payment minimums. For instance, the HomeReady loan program from Ally Bank requires applicants to have a debt-to-income ratio of no more than 50%, among other criteria.

If you want to calculate your debt-to-income ratio, here’s what you do: Add up all your monthly debt payments, which include credit card payments, student loan payments, and payments to any other lines of credit you may have. Then Divide this number by your gross income amount. The result is your debt-to-income ratio.

How to consolidate and best payoff debt

If you have an unhealthy amount of debt and are preparing to get a mortgage, consider these strategies to consolidate and pay down your debt.

The debt snowball method is one debt management method where you focus on eliminating the smallest debt balance first while paying just the minimum on all your other debts. On the other hand, the debt avalanche method involves eliminating your highest-interest debt first. Both methods can be instrumental in helping you crush your debt balance in a more organized way.

Debt consolidation is another popular method for paying down debt if you carry balances on multiple credit cards or have multiple loans. Essentially, you’ll apply for a personal loan that’s enough to cover the total amount of debt on all your credit cards. Then, once you’re approved, the lender sends the funding amount to your creditors, which pays off your credit cards. From there, you’ll just have to pay back the personal loan you borrowed.

This method can potentially help you save on interest since personal loan lenders typically offer much lower interest rates compared to credit card issuers. The Happy Money personal loan is one of the best debt consolidation loans out there since this lender will send your funds directly to creditors.

Balance transfer credit cards with a 0% intro APR period are another useful option for getting rid of debt since these credit cards allow you to make interest-free monthly payments for a limited time. Interest charges can eat into your monthly payments and make it feel like your balance is barely going down. With this method, you basically transfer the balance of your current credit card onto a new credit card and you try to pay off the balance before the interest-free period is over.

The Citi® Diamond Preferred® Card offers an intro APR period of 0% for 21 months on balance transfers (after, the 18.24% – 28.99% variable). So you’ll basically have almost two years to make interest-free credit card payments. Just keep in mind that you’ll have to pay a 5% transfer fee on each balance that you transfer ($5 minimum). Balance transfers must be completed within 4 months of account opening.

The Wells Fargo Reflect® Card also offers an intro APR period of 0% for 21 months from account opening on purchases and qualifying balance transfers (after, 18.24%, 24.74%, or 29.99% variable). Balance transfers made within 120 days from account opening qualify for the intro rate, BT fee of 5%, min $5.

Bottom line

Having experience managing debt in a healthy manner can help you get approved for a mortgage, but the key here is to make sure you’re practicing positive habits with your debt. Continue making on-time monthly payments toward your debts, don’t let your credit utilization rate get too high, and be wary of the amount of debt you have in relation to how much you earn.

Source: cnbc.com ~ By: Jasmin Suknanan ~ Image: Canva Pro

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Tips for First-Time Home Buyers

Celebrating moving

Learn strategies for saving a down payment, applying for a mortgage, shopping for a house, and more.

It’s exciting — and a little scary — to think about buying your first home. Even when you know you’re ready to buy a house, you might not be sure where to begin. These tips for first-time home buyers will help you navigate the process from start to finish.

Preparing to buy tips

1. Start saving early

When calculating how much money you need to buy a house, consider one-time expenses as well as new, recurring bills. Here are the main upfront costs to consider when saving for a home:

  • Down payment: Your down payment requirement will depend on the type of mortgage you choose and the lender. Some conventional loans aimed at first-time home buyers with excellent credit require as little as 3% down. But even a small down payment can be challenging to save. For example, a 3% down payment on a $300,000 home is $9,000. Use a down payment calculator to decide on a goal, and then set up automatic transfers from checking to savings to get started.

  • Closing costs: These are the fees and expenses you pay to finalize your mortgage, and they typically range from 2% to 6% of the loan amount. Your closing costs on a $300,000 loan could be between $6,000 and $18,000. That’s additional money you’d have to pay, on top of your down payment. In a buyer’s market, you can often ask the seller to pay a portion of your closing costs, and you can save on some expenses, such as home inspections, by shopping around.

  • Move-in expenses: Remember to budget for moving costs, which typically run up to $2,500 for most local moves. (Long-distance moves can be much pricier.) You’ll need some cash after the home purchase. Set some money aside for immediate home repairs, upgrades and furnishings.

2. Decide how much home you can afford

Figure out how much you can safely spend on a house before starting to shop. NerdWallet’s home affordability calculator can help with setting a price range based on your income, debt, down payment, credit score and where you plan to live.

3. Check and polish your credit

Your credit score will determine whether you qualify for a mortgage and affect the interest rate lenders will offer. Having a higher score will generally get you a lower interest rate, so take these steps to polish your credit score to buy a house:

  • Get free copies of your credit reports from each of the three credit bureaus — Experian, Equifax, and TransUnion — and dispute any errors that could hurt your score.

  • Pay all your bills on time, and keep credit card balances as low as possible.

  • Keep current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score.

  • Avoid opening new credit accounts while you’re applying for mortgages. Opening new accounts could put a hard inquiry on your credit report and lower the overall average age of your credit accounts, which could hurt your score. 

    • Standard inspections don’t test for things like radon, mold or pests. Understand what’s included in the inspection and ask your agent what other inspections you might need.

    • Make sure the inspectors can get to every part of the house, such as the roof and any crawl spaces.

      • An existing home generally costs less than buying a new construction home. But if local inventory is low and you have the means, a brand-new home offers enticing options to customize.

      • A condominium or townhome may be more affordable than a single-family home, but shared walls with neighbors will mean less privacy. Don’t forget to budget for homeowners association fees when shopping for condos and townhomes, or houses in planned or gated communities.

      • A manufactured home, including the type commonly called a mobile home, can be an affordable option if you have a tight budget. You’ll need to title it as real property and affix it to a permanent foundation if you want to finance it with a traditional mortgage. Many manufactured homes are financed through chattel loans, which have higher interest rates than mortgages.

      • Fixer-uppers, or single-family homes in need of updates or repairs, usually sell for less per square foot than move-in-ready homes. However, you may need to budget extra for repairs and remodeling. Renovation mortgages finance both the home price and the cost of improvements in one loan.

        The buyer doesn’t have to attend the inspection, but it could be useful to be there. By following the inspectors around you can get a better understanding of the home and ask questions on the spot. If you can’t attend the inspections, review the reports carefully and ask about anything that’s unclear.

        4. Explore mortgage options

        A variety of mortgages are available with varying down payment and eligibility requirements. Here are the main categories:

        • Conventional mortgages are the most common type of home loan and are not guaranteed by the government. Some conventional loans targeted at first-time buyers require as little as 3% down.

        • FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.

        • USDA loans are guaranteed by the U.S. Department of Agriculture. They are for suburban and rural home buyers and usually require no down payment.

        • VA loans are guaranteed by the Department of Veterans Affairs. They are for current military service members and veterans and usually require no down payment.

        You also have options when it comes to the mortgage term. Most home buyers opt for a 30-year fixed-rate mortgage, which is paid off in 30 years and has an interest rate that stays the same. A 15-year loan typically has a lower interest rate than a 30-year mortgage, but the monthly payments are larger.

        If you plan to stay in the home for only a few years, you might consider an adjustable-rate mortgage or ARM. ARMs often start with a lower fixed-interest introductory rate, enabling you to buy a more expensive home for the same monthly payment, but they can also increase (or decrease) over time.

        5. Research first-time home buyer assistance programs

        Many states and some cities and counties offer first-time home buyer programs, which often combine low-interest-rate loans with down payment assistance and closing cost assistance. If you meet low- to moderate-income benchmarks, you could qualify for a grant or forgivable loan that doesn’t need to be paid back.

        Tax credits, known as mortgage credit certificates, are also available through some first-time home buyer programs.

        6. Compare mortgage rates and fees

        Plan to shop around for mortgage lenders and compare three to five different quotes. Doing so could save you thousands of dollars in interest over the lifetime of the loan.

        The Consumer Financial Protection Bureau recommends requesting loan estimates for the same type of mortgage from multiple lenders to compare the costs, including interest rates and possible origination fees.

        Lenders may offer the opportunity to buy discount points, which are fees the borrower pays upfront to lower the interest rate. Buying points can make sense if you have the money and plan to stay in the home for a long time. Use a discount points calculator to decide.

        In a buyer’s market, some motivated sellers may offer to pay some or all of the buyer’s points to close the deal.

        7. Gather your loan paperwork

        Before you’re approved for a mortgage, your lender will ask you for financial records to verify your income, assets, and debt, including:

        • Proof of income and employment, such as tax returns, W-2s and 1099s.

        • Statements for bank, retirement, and brokerage accounts.

        • Records of debt payments, such as student loans, auto loans, or any real estate debt.

        • Documentation of other events that impact your finances, such as divorce, bankruptcy, or foreclosure.

        Pull these documents ahead of time to stay organized throughout the process — you’ll need them for a mortgage preapproval as well as when you apply for the loan.

        8. Get a preapproval letter

        A mortgage preapproval is a lender’s offer to loan you a certain amount under specific terms. Having a preapproval letter shows home sellers and real estate agents that you’re a serious buyer and can give you an edge over home shoppers who haven’t taken this step yet.

        Apply for preapproval when you’re ready to start home shopping. A lender will pull your credit and review the documents you organized in the previous step. Applying for preapproval from more than one lender to shop rates shouldn’t hurt your credit score as long as you apply for them within a limited time frame, such as 30 days.

        Home shopping tips

        9. Choose a real estate agent carefully

        A good real estate agent will scour the market for homes that meet your needs and guide you through the negotiation and closing processes. Get agent referrals from other recent home buyers. Interview at least a few agents and request references. When speaking with potential agents, ask about their experience helping first-time home buyers in your market and how they plan to help you find a home. You might also ask how they find homes that aren’t yet on the market, which can be a handy skill when buyer competition is fierce.

        10. Narrow down your ideal type of house and neighborhood

        Weigh the pros and cons of different types of homes, given your lifestyle and budget.

      Think about your long-term needs and whether a starter home or forever home will meet them best. If you plan to start or expand your family, it may make sense to buy a home with extra room to grow.

      Research potential neighborhoods thoroughly, including property values, property taxes, and safety considerations. Choose one with amenities that are important to you, including schools and entertainment options. If you work away from home, test out the commute during rush hour.

      11. Stick to your budget

      To avoid financial stress down the road, set a price range based on your budget — and then stick to it.

      A lender may offer to loan you more than what is comfortably affordable, or you may feel pressure to spend outside your comfort zone to beat another buyer’s offer in a bidding war.

      In a competitive market, consider looking at properties below your price limit to give some wiggle room for bidding. In a buyer’s market, you may be able to view homes a bit above your limit. Your real estate agent can suggest a range for your offering price.

      12. Make the most of walk-throughs and open houses

      Online 3D home tours have become more popular as technology improves. They don’t supply all the information in-person visits do — like how the carpets smell — but they can help you narrow the list of properties to visit.

      It’s possible to buy a house sight unseen, but it’s always best to visit in person. Open your senses when walking through a home. Listen for noise, pay attention to any odors, and look at the overall condition of the home inside and out. Ask about the type and age of the electrical and plumbing systems and the roof.

      Home purchasing tips

      13. Don’t skip the home inspections

      A home inspection is a thorough assessment of the structure and mechanical systems. Professional inspectors look for potential problems, so you can make an informed decision about buying the property. Here are some things to keep in mind

    14. Negotiate with the seller

    You may be able to save money by asking the seller to pay for repairs in advance or lower the price to cover the cost of repairs you’ll have to make later. You may also ask the seller to pay some of the closing costs. But keep in mind that lenders may limit the portion of closing costs the seller can pay.

    Your negotiating power will depend on the local market. It’s tougher to drive a hard bargain when there are more buyers than homes for sale. Work with your real estate agent to understand the local market and strategize accordingly.

    15. Buy adequate home insurance

    Your lender will require you to buy homeowners insurance before closing the deal. Home insurance covers the cost to repair or replace your home and belongings if they’re damaged by an incident covered in the policy. It also provides liability insurance if you’re held responsible for an injury or accident. Buy enough home insurance to cover the cost of rebuilding the home if it’s destroyed.

    It may be worth buying an umbrella policy if you need to cover your home, cars, and other major assets.

    Source: nerdwallet.com ~ By: Barbara Marquand ~ Image:

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What to Expect From the Housing Market in the Second Half of 2023

What to Expect From the Housing Market in the Second Half of 2023

The outlook of the U.S. housing market in the second half of the year comes down to two familiar words: mortgage rates.

In the first half, high rates have kept housing in a state of suspended animation, as borrowing costs priced out prospective buyers, while homeowners with mortgage rates of 3% or less are unwilling to sell and face having to borrow for their next home at something closer to 7%.

KEY TAKEAWAYS

  • Experts expect mortgage rates to even out around 6% by the end of the year.
  • A new trend of domestic migration into Sun Belt cities is expected to continue.
  • New single family home building will make a dent in the need for housing inventory.

Despite high demand and home prices that are now starting to fall, the market is still relatively sluggish at a point in the year where it’s historically at a peak. While new construction is rising to meet some of the demand for single-family homes, it won’t be enough to meet the current market needs.

So what can homebuyers expect for the latter half of 2023? While the Federal Reserve is expected to continue raising rates through the end of the year, industry leaders foresee mortgage rates dropping and homebuying subsequently picking up as home prices fall and affordability improves.

Still, few expect a recovery that would allow the market to catch up with the pace of activity the U.S. saw in 2022.

Rates Will Determine Trajectory of Market

The Federal Reserve has signaled that more rate hikes may be in store before the end of the year. Once the rate hikes slow or stop, affordability concerns will slowly start to ease, according to Realtor Chief Economist Danielle Hale.

“It means affordability will start to improve, but not drastically,” Hale said.

Experts see mortgage rates headed on a more stable path. As inflation is expected to continue cooling, mortgage rates are expected to decline.  Another peak is anticipated for June, but Hale predicts it could be the final uptick before conditions begin to even out.

“We think that June will have been another temporary peak in mortgage rates and we’ll see them gradually ease from the 6.7% range they’ve been in recently, down to near 6% at the end of the year, likely hovering just above 6%,” Hale said in an email.

That evening out around 6% will help homebuyers who have been waiting on the sidelines to re-enter the market, according to National Association of Realtors Chief Economist Lawrence Yun, but it may not be enough to ease the lack of inventory just yet.

“That will help boost both housing demand and supply. For homeowners who are mishoused (i.e., new child in the family, new job in the other part of town, etc.) but have been unwilling to sell due to locked-in low rates, the cost of a move becomes less costly with falling mortgage rates,” Yun said in a statement provided to Investopedia.

Inventory Boost Expected to Help Meet High Demand

As mortgage rates cool, inventory is expected to tick up again throughout the latter half the year. Chronically low inventory of existing homes is dampening market conditions.  Analysts at Fannie Mae anticipate low inventory when it comes to existing homes through the end of the year.

“We continue to expect that existing home sales will decline modestly through the rest of the year amid a broader economic slowdown, ongoing affordability constraints, and limited inventories of homes available for sale,” Fannie Mae’s economic and strategic research group wrote online.1 “The ongoing lack of existing home inventory continues to provide a boost to the new home market, though, as May represented the largest single-month jump in single-family starts in percentage terms since June 2020.”

Compass CEO Robert Reffkin told CNBC he thinks when rates drop back down to around 5.5%, that’s when the inventory logjam should begin to clear.

“The issue we are seeing is that we need to have an unlock of inventory. It’s probably going to happen when mortgage rates get to 5%, 5.5% at a sustainable level. At that point, I would expect there to be a flood of inventory in the market, and it’ll feel like the pandemic craze all over again,” Reffkin said.2

Meanwhile, homebuilding is picking up to help fill inventory gaps across the country. May brought a significant uptick in the sale of new single-family homes, which rose 20% year-over-year and 12.2% from April.3

Home Prices Likely To Decline

Weak home prices are expected over the summer months, when they are typically at their peak, according to Realtor’s Hale.

“Specifically, while June is expected to be the seasonal peak for home prices in 2023, like it is most years, we won’t see as big of a month to month climb as we did in 2022, which will mean ongoing mild declines when we’re comparing home sale prices to one year ago,” Hale said.

The declines are expected to run through the early fall, depending on the Federal Reserve.

“By the time we get to the fourth quarter, mortgage rate and seasonal home price relief could be enough to stanch the declines” Hale added. “On net, we expect average home prices in 2023 to fall 0.6% compared to 2022.”

As supply boosts and mortgage rates and home prices fall, sales are expected to rise through the end of the year, according to NAR’s Yun.

“We’re likely approaching the bottom in home sales with steady improving home sales in the second half of the year and into 2024,” Yun said.

Source: investopedia.com ~ By: MEG CUNNINGHAM ~ Image: Canva Pro

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Making an Offer On a New Home: Real Tips From Real Estate Agents

Offer accepted, sale pending

Think of making an offer on a home as setting the roller coaster in motion: You might have sharp drops in emotion and slow, trudging climbs to success, but the ride won’t end until the car slows down and the safety bar is lifted. (OK, this metaphor is now officially over.)

But to begin the process, you need to know how to make the right offer, an offer that will end with your receiving the keys to your new house. So check out some of these agent-approved negotiation tactics to make the offer process a whole lot less bumpy.

Pick the right price

Just because a home is listed for $400,000, it doesn’t mean the home is actually worth that much.

It all depends on the current conditions of the local market. If you’re buying in a hot market—especially places with low inventories—offering substantially below asking price is “probably wasting your time,” says Mindy Jensen, a Realtor® with Equity Colorado. But if a home has been sitting unsold for a few months, the sellers may not expect full price. Your best bet at measuring prices in your target area are comps, or what similarly sized homes nearby have sold for recently.

Work with your real estate agent to determine a fair offer. They will have the best read on pricing and marketplace dynamics, and can walk through the local comps with you. Your agent can also help you determine what a fair discount might be without offending the seller. While specific numbers will depend on your market, a rule of thumb is that it is unrealistic to go below 5% of a home’s list price unless it’s been sitting on the market for months. Which leads us to…

Lowball with care

Sometimes a home is priced just too high—no ifs, ands, or buts—or perhaps it’s been sitting unsold for half a year. In those situations, a lowball offer well under asking price might be the right strategy to get the home you love for a bargain price. However, this is a tool to be deployed rarely and with great care—especially if the current owners have lived there for many years.

“Longtime owners usually have tons of pride in their home, and want the new owners to love it like they do,” says Jodie Burns, a Realtor with McEnearney Associates. “Buyers who lowball run a risk of angering the seller and losing the house. Ideally, you’re looking for a closing where both sides feel like they got a fair deal.”

So don’t lowball unless both you and your agent agree that it’s the best tactic to sway a seller. It can be perilous, so it’s best to keep this strategy on the sidelines unless you’re fairly certain it won’t cause a seller to walk away entirely.

Also, think about the big picture. Don’t let a (relatively) small amount come between you and a house you adore. “If a couple of thousand dollars is going to keep them out of a home they love, I remind buyers how little that amount translates into a monthly payment,” Burns says.

Consider contingencies

Along with the price, you’ll also want to factor contingencies into your contract. The more hurdles in the way of the sale, the more likely one of them will trip you up.

For example, do you need to sell your own home first, which requires a selling contingency? Work with your agent to decide what you’ll ask for off the bat—and consider dropping some requests if the market is hot.

As Jensen explains, “Your chances are best if you ask for the fewest things.”

That said, don’t put yourself at risk to get the home you love. Some aggressive buyers might advocate dropping the home inspection clause to sweeten an offer, but that can be dangerous, especially in older homes.

Keep your emotions in check

Yes, the search seems to have dragged on forever; yes, this home has everything you need. But keep your wits about you.

“Don’t fall in love,” Jensen says. “Falling in head over heels with a home can make you do ridiculous things, like overpay.”

Plus sometimes, even an “excellent offer may not be accepted,” says Vici Boguess, a Realtor with the Burke Boguess Zimmerman Group in Alexandria, VA. Don’t assume a rejection is an insult—the sellers might just dislike some of your contingencies or are holding out for a better offer. So, don’t assume it’s over until it’s over.

Source: realtor.com  ~ By Jamie Wiebe ~ Image: Canva Pro