Mortgage Minute: Do I Want to Buy a Home?

This is the first of a series of articles from our guest blogger, Cynthia Carr of Stearns Lending.

I am a big believer that people should be informed and educated on mortgage loans. This is the single largest purchase of your life and you only get one chance to do it right the first time. Home ownership is one of life’s major events, and it provides some unique personal and financial rewards. It can provide lasting stability and security and a great place to relax at the end of the day.

Here are a few things to consider if you’re still undecided about taking that leap:

• Home ownership may offer you important tax benefits.
• You’ll have the potential to build equity. This is the portion of your home that you’ve paid for, plus any rise in its value.
• You can decorate and remodel your home to suit your personal tastes.
• It’s a potential investment, since your home’s value may appreciate over the years.
• You won’t have to worry about your rent going up when your lease expires, or having to move if your rental property is no longer available or affordable.

Now that we have giving you the reasons why you should consider purchasing your new home, let’s discuss the first steps. It can be overwhelming! What do I do first? Do I get a Realtor? How do I get a Realtor? Can I qualify for a mortgage? If so, what does that mean in terms of purchase price of a property? How much money do I need? If you haven’t considered these questions, you should now. This blog series is going to guide you and prepare you for home ownership and all that comes with that from those questions to the final signature on the loan documents and getting the keys to your new home.

This month we will discuss this very important step: Do I want to purchase a home?

Let’s think about that for just a second. The knee-jerk reaction is “of course I do," but in reality you have no idea how or where to start. The very first thing you should do is to find a mortgage lender. You can ask friends, family, or colleagues for the name of the lender they worked with when they purchased a home. Please know that it is important to feel informed and confident with your lender. Getting more than one option and talking to more than one lender is absolutely the right thing to do. I know, I know, I am a lender and other lenders will not be happy that I tell you to do that. The truth is that when you have your credit pulled for a mortgage within a 14-day period, it is very unlikely that your credit score will be impacted any more than if it were only one lender checking it. Do not have more than three lenders pull it because rates are rates and all lenders are very close in that area and when you have more than three options it becomes less helpful and more confusing.

Avoid online lenders. They are not familiar with all markets and central Ohio has its own quirks when it comes to who pays for what and what credits the buyer receives from the seller. You need to feel confident in your decision. You will feel like you are going to a financial therapist when you start talking to a lender. We ask questions that have always been “taboo” to talk about: How much money you make, the debts on your credit report, and how much money you have in the bank. These are all serious questions and are a requirement for your lender to know. This confidential information is not shared with anyone unless you as the borrower provide us with the permission to do so.

Let’s wrap this month’s discussion up with a final thought. Before you start house hunting, find a lender who cares about you, one you trust, and who has the knowledge to help you with purchasing the place you call home.

Cynthia is the Branch Manager at the Stearns Lending, 1900 Polaris Parkway in Columbus and can be reached at CCarr@Stearns.com.

3 Home Buying Myths

1. Buying is always better than renting.  Even though buying a home has tax advantages and secures consistent monthly payments, home-maintenance can be expensive and time-consuming. Typically, buying is only better than renting if you plan to live in your home for 5-7 years or longer, which is roughly as long as it takes for homeowners to break even. Fannie Mae recently revealed that 23% of renters are postponing their plans to buy, and the main reasons people give for purchasing a home are non-financial (43% cited safety as the primary factor while 33% said school quality). One way to estimate whether it's more beneficial to buy is by calculating if the home costs more than 15% of the annual cost of renting a similar home. If  so, you'll get a better deal renting. Still can't decide which option is best for you? Use the rent vs. buy calculator to help or contact me for personal guidance.

2. Real estate is the best investment. Today, investors earn a higher return on investments in stocks than they do on real estate. Within the past 10 years, home prices have risen by only 0.3% annually whereas the S&P 500 has returned an average of 8.26%.  Financial writer Jack Hough cites that over the long run, stocks have rewarded investors with 7% inflation-adjusted return over long periods, while homes earned their owners close to 0%. This is partially explained by the fact that homes don't produce anything. Unless homeowners take measures to actively upgrade their homes, they can only increase in value as the ability of the people to purchase them rises. Appropriately, another Fannie Mae survey illustrated that the proportion of people who believe that buying a home is one of the safest available investments decreased from 83% in 2007 to 70% in 2014. Ironically, only 17% considered stocks safe at that time.

3. The bigger the down payment, the better. Putting down a 20% down payment means you won't have to buy mortgage insurance and you ultimately will borrow less (thus paying less in interest). However, it is not always necessary. You can pay a smaller down payment in exchange for buying PMI (private mortgage insurance) until you have enough home equity (usually 20%) to remove it. Increasingly popular FHA loans accept down payments as low as 3.5%. Smaller down payments (with mortgage insurance) may actually gain you better interest rates than a 20% down payment without insurance, since lenders feel safer when loans are insured. Additionally, saving for a large down payment takes time-home prices may rise in the meantime, or you could miss the opportunity to buy a home you truly love. Smaller down payments ensure all off your money is not tied up in home equity, allows you to diversify your investments (for example, across stocks), and still permits you to pay off the loan early and quit paying mortgage insurance once you put 20% down.

Pre-Qualify for a Loan

House hunting is exciting, but the idea of financing a home is not. Meet with a mortgage officer to pre-qualify for a home loan. A pre-qualification, AKA prequal, illustrates a borrower's ability to get a loan. It's easier to obtain than a pre-approval because someone can get a pre-qualifcation online or over the phone; however, it is not as in depth as a pre-approval, which requires paperwork to back up your claims. Ideally, homebuyers should 1) get pre-qualified, 2) get pre-approved, 3) shop for a home based on their pre-approval, and 3) apply for the home loan. If your pre-qualification application isn't accepted the first time around, follow these three steps to improve your situation:

• Increase your credit score. You can improve your credit score in a number of ways. Order a copy of your credit history from TransUnion, Equifax, or Experian. Dispute any errors you come across--they will be removed within 30 days. Paying down your debt also helps, as debt accounts for 30% of your FICO credit score. Finally, pay your bills on time to slowly but steadily increase your score. 

• Don't change jobs. Lenders like to see that you've been with the same employer for at least two years, because this gives them confidence that you are stable and able to repay your mortgage. 

• Build income and financial assets. The simplest ways to afford the home you want are to get a pay raise and search for a lower priced home. Perhaps less obvious, you can find a co-borrower with good credit, hoping that your combined incomes will make the loan feasible. Build your assets by keeping a contingency fund--money reserved for emergencies with unexpected cash outflows. The fund should equal two or three months of your mortgage payments, and you must be able to prove (with bank statements) that this money has been in your account for at least 60 days prior to pre-qualification. 

Want to see if you will be approved before you visit a lender? Visit Bankrate.com's free online loan pre-qualification calculator. If you prefer to do the math yourself, the first step is the same--get your credit score. lenders prefer credit scores of 680+. Next, you should calculate the front-end ratio and the back-end ratio.

• Front-end ratio: proposed monthly mortgage payment / gross monthly income before taxes. This tells you how much of your monthly income goes toward mortgage payments and is not recommended to exceed 28%.
• Back-end ratio: total monthly debt obligations / gross monthly income. This tells you how much of your monthly income goes toward paying debts and is not recommended to exceed 36%. Note: debt obligations include credit cards, student loans, car loans, etc.

Finally, ensure that you have enough money for a down payment. As with contingency money, lenders like to see down payment funds in your bank account for a least 60 days. They also like for people to have their own money saved for a down payment--not the money of their friends or family.

As of July 2014, the average 30-year fixed rate mortgage was 4.13%

Bad Credit? Don't Panic

Your credit score is important—it’s what lenders use to determine your qualifications for a home loan. You can request a free credit report here.  Then meet with a lender, who can help you come up with a game plan to strengthen it. Keep in mind it can takes months, or even a year, for your credit score to rise after you improve your finances. The illustration below breaks down how your credit score is determined:

If you have excellent or good credit (a score of 700+ according to credit.com), you’re in good shape. But what if you’ve got poor or bad credit, at 649 and below? Conventional loans may not be able to help. Instead, talk to a lender about the Federal Housing Administration’s loan program, which requires a credit score minimum of only 580 (most lenders, however, require 620 or 640) for a loan with a down payment of 3.5%. Lenders will also want to see documentation of your income and assets to calculate your debt-to-income ratio, which, as a rule of thumb, should not exceed 41% of your monthly gross income. The FHA insures lenders against default and offers mortgage rates comparable to those of conventional loans. However, FHA loans do have higher mortgage insurance requirements than conventional loans, as mortgage insurance payments must be made for the entire life of the loan unless you make a bigger down payment. Remember, a lender can always help you determine which type of loan is best for you.

Post-Grad Housing Market Expected to Improve

90% of Americans 35 and younger prefer to own a home over renting one, according to a recent Fannie Mae survey. However, only 36% do own a home, down from the 2005 peak (43%) and the lowest percentage yet since home ownership by age was first recorded in 1982. Many factors come into play when examining barriers to home ownership, including the following:

• Student debt. It's no secret that the cost of higher education is rising. Moreover, more students are pursuing advance degrades (such as a masters degree or MBA), luring students even further into debt.

• Stagnant wage growth. Recently, wage growth has been offset by higher prices, hindering prosepctive homeowners. 

• Tight lending standards/inadequate credit. Not having enough credit makes it difficult for prospective homeowners to qualify for loans. Tight lending standards make it even more difficult, as lenders are more selective when approving people for home loans. Unfortunately, it takes time to build a good credit score. 

• Competition. Ironically, many of America's "youngest" cities are also the most expensive--New York City, Chicago, Las Angeles, and San Francisco among others. Competition in these cities drives up housing prices, pricing young residents out of the market. Furthermore, people in their 20s and early 30s cannot compete with the all-cash offers that are more common in competitive markets. 

• Low inventory. Low inventory has characterized the housing market for over a year now, meaning the market typically favors sellers over buyers. When in-damand houses enter the market, they tend not to stay there long; some sell within the week. This discourages first-time homebuyers, who want more time before committing to any given house. 

• Inability to generate a down payment. Many of the above points (including stagnant wage growth and student debt) result in the inability to generate a down payment. People in their 20s and 30s have yet to reach their prime earning years, and have also had less time to build up their savings. 

Fortunately, things are looking up for young homeowners. Mortgage lending is loosening up, as lenders approve people with lower credit scores and smaller down payments. As the job market continues to recover from the 2007-2008 crisis, incomes are expected to rise. However, this will likely not result in a housing "boom." Currently, many recent graduates are living with a parent (11 million in 2012, according to Pew Research Center). Instead, college graduates will slowly and steadily trickle out of their parents' homes and into the adult world.

To Buy or Sell First?

If you already own a home and are looking for a new one, you’re faced with a challenging question: should you sell your current home before you buy your new one, or vice-versa? To help make this decision, consider the following three factors:

1) Market conditions. You may have heard terms such as "seller's" or "buyer's" market. However, when you sell and buy homes, you must consider the housing market for your given neighborhood, house style, and price. Work with a professional Realtor to get an idea of how long your home should sit on the market, and about how long it should take you to find what exactly you are looking for. Use online resources such as Realtor.com to see how common homes are that meet your criteria. 

2) Finances. Many people need the equity from selling their current home to put towards the down payment on their new home. So what do you do while transitioning? You could stay with friends or family, or temporarily move into a rental unit (this may require you to rent a storage unit, as well). Alternatively, you can rent your home from your buyers in order to give you more time. The rent-back term is only valid for a maximum of 60 days, as a longer lease would categorize the home as income property. Lenders may be able to help you by granting you a bridge loan. The drawback to selling your home before you buy another is that you may feel rushed if you are unable to find a home you like in a reasonable amount of time.

3) Risk Aversion. Would you rather be stuck with nowhere to live, or with two mortgages? Regardless, Realtor.com advises homeowners to have a backup plan—for example, an alternative source of income or a place to stay should you sell your home sooner than expected. 

Guidelines for First Time Homebuyers

Home ownership is a big investment in time, money, and lifestyle. To get the most for your money, follow these four guidelines.

1. Boost your credit score. How? Request your free credit report at the start of the year. Dispute issues and pay off debt. Refrain from opening new credit lines and avoid buying big ticket items such as cars and furniture, as this will cause your score to temporarily drop.  Your credit score influences your mortgage approval and rates.

2. Save for a down payment. Also to get the best mortgage rates, plan for a 20-30 percent down payment. Cut optional expenses and save that money for either a down payment or private mortgage insurance.

3. Do your research. Determine what type of loan you want (conventional or unconventional), what you can afford, and what you qualify for. An online mortgage term comparison calculator will help you get an idea of the cost. To see current rates and get quotes from local lenders, click here.

4. Find the best Realtor. In an age dominated by technology, a Realtor remains irreplaceable. Buying a house is stressful—let a professional guide you through the process, negotiate on your behalf, and handle paperwork. Realtor.com suggests looking at various Realtor’s client testimonials—read mine here. I work with both buyers and sellers in the Central Ohio area. If I can help you or someone you know, please contact me. 

Determining Your Mortgage Payment

When buying a home, one of the most important factors is price. How much you can spend on a home depends on how much cash you can put down on a down payment, and how much money you can borrow. Before you begin looking for a home, seek pre-approval, based on credit and income, from a lender. Additionally, determine what you, personally, are comfortable paying. Your lender will be much less familiar with your lifestyle and future plans, and therefore will not consider some pertinent factors when approving you for a loan. Are you saving up for a family? Do you travel often? These are just a couple of questions you should ask yourself when generating your housing budget. To estimate your ideal mortgage payment, you can assess your current comfort level with your rent payment and look at your monthly income and expenses.

As a homeowner, your housing payment includes:

• Principal 
• Interest 
• Property taxes 
• Homeowners' insurance. 

Additional expenses:

• If you put less than 20 percent down on your home, you will have to pay mortgage insurance. 
• At least 1 percent of the home price should be set aside for maintenance and repairs.
• Some homeowners need to pay homeowner association dues (HOAs) or condominium fees. 

Lenders will look at your debt-to-income ratio when approving a loan. Most lenders won't approve loans with a ratio higher than 41-43%. You can use a mortgage calculator to help determine your debt-to-income ratio. Essentially, you'll want to divide your gross monthly income (all income documented by paystubs or tax returns) by your monthly debt payment (new housing payment and minimum monthly payment on outstanding debt, such as a credit card, a car loan, or child support).

Aside from income and debts, lenders will also look at:

• Assets
• Downpayment
• Credit score 
• Job history 

Your mortgage payment depends on your loan term and interest rate. A shorter loan term generally has a lower interest rate; however, it also means higher monthly payments. Interest is also affected by credit score. A higher credit score means a lower interest rate. Ultimately, a good lender can evaluate your personal circumstances and make recommendations for a loan program based on your individual financial needs. 

The Inside Scoop on Rent-to-Own Agreements

What is a rent-to-own agreement? 

• A rent-to-own agreement is a contract between a property owner and a renter in which a renter agrees to rent the property for a predetermined amount of time, usually 1-3 years. The renter pays an above-market rate and allocates excess rent towards a down payment.  At the end of this time period, the renter purchases the home at the price stated in the contract.  

Who do they benefit?

• Rent-to-own leases can benefit both homeowners and renters. They are great for sellers who are eager to move out but have yet to sell their home.  Similarly, they benefit renters who are equally as eager to buy a home but lack financial preparedness. For example, renters may need additional time to save for a down-payment, improve their credit score, or pay off debt. Rent-to-own agreements allow renters to secure and settle into the home they want before having to actually but it. 

When is it a bad idea?

• Renters who are not positive they want to remain in their rental should be wary of rent-to-own agreements. Because renters pay above-market rent in such contracts, it may be more practical to simply rent a home rather than sign a rent-to-own agreement. This is less expensive and offers the renter more flexibility when looking for a home after their lease is up. 

What should rent-to-own agreements include?

• An attorney should be hired to draft a rent-to-own agreement. It's also advisable to consult a lender. Generally speaking, a rent-to-own lease should specify the following information:
• Length of the lease period.
• Rental rate.
• Rent credit for down payment and how it will be held until the time of purchase.
• Who will pay for maintainance, repairs, utilities, property taxes, insurance, and homeowner fees during the lease period.
• When the title is transferred to the renter.
• What happens if home values rise or fall between the time the contract is signed and the time of purchase. 
• Who is responsible if something happens to the property during the rental period. 

Finally, I recommend that renters have a home inspection before buying any property, even if they have been living in it. Interested in renting or buying a home? Contact me.

Put Zero Down on Your New Home

While the main sources of home-loan money, Fannie Mae and Freddie Mac, require a down payment before they fund a loan, they are not the only sources available. The Navy Federal Credit Union is a federally chartered credit union that offers a zero-down payment program for borrowers.

The Navy Federal Credit Union is the nation's largest credit union and consists of 4 million members. It offers a zero down payment option for qualified buyers, and does not require mortgage insurane. Loans are usually around $200,000, although the maximum is $1 million. This often benefits first-time homebuyers, who are credit worthy but lack the cash for a down payment. Delinquencies are well under 1 percent, suggesting that down payments are just a part of the home-loan financing process. The importance of smart underwriting and good servicing is not to be overlooked.

How to Avoid Buyer's Remorse

Jim Weiker, writer for The Columbus Dispatch, shares some survey results that could provide valuable lessons to buyers. A Trulia survey was issued this spring to 2,130 Americans. Here are the results:

52% of those surveyed expressed some regrets about their current residence

34% wish they had bought a bigger home
27% wish they had done more remodeling
22% wish they had known more about the home before deciding to buy it
18% wish they had put more money down
16% wish they had been more financially secure before buying.

Concerned about buying the right home? Contact me to see how I can help!

To Rent or Buy? 5 Questions to Guide Your Decision

Torn between buying and renting? Consider these five questions, inspired by a CNN news article, to help guide your decision:

How long do you plan to stay?

If you are not planning on keeping you home for five to seven years or more, transactional costs associated with home buying and selling, such as commissions and closing costs, may not be worth it. 

Do you have enough cash to cover closing costs?

Banks typically don’t lend more than 80% of the cost of the home. Buyers have to come up with a 20% down payment, on top of closing costs. Take 20% of the home you are considering purchasing—can you afford a down payment of that amount?

Can you cover additional homeownership costs? There are many expenses, aside from the mortgage, associated with homeownership, such as property taxes, insurance, heat, utilities and regular maintenance. When you rent, you often forgo some of these financial responsibilities. 

Can you claim the tax advantages of homeownership? Yes, mortgage payments are deductible and can reduce tax bills. However, this benefits high-income earners with significant mortgage payments. Many borrowers claim the standard deduction on their taxes and save nothing from the deduction.

Do you have a stable job? This determines whether you can expect to be able to afford the above expenses! If your employment situation is unsteady, it’s probably not a great idea to assume the responsibility of homeownership until more stable ground is reached. 

The New York Times has created a calculator that allows you to enter personal information such as monthly rent, home price, down payment, mortgage rate, and annual property taxes to determine how long you would have to live in a home so that buying would be more cost-efficient than renting.