Financing Tips From the Experts

Your finances play a huge part when it comes to buying a home. Sometimes it can be an unexpected move, a company relocation can happen and you need to be ready. Here are several tips on getting your finances up to par.

1. Know What Lenders Look For

Knowing what a lender will want to see can really help you along the way. Be familiar with what they look for on a home loan application. Basically, they will want to make sure you are able to afford to pay back the loan and closing costs. Not only will you need money in your pocket, but will also need to be credit-worthy. The better your credit score, the better the interest rate. Lenders will want to know your income, employment history, recent banking activity, debt-to-income ratio, credit score, estimated down payment and assets.

2. Boost Your FICO Score

A FICO score is high on the list for lenders to look at when it comes to a loan. As mentioned before, the higher your credit score the better your interest rate. If you need to boost your score, make it a priority to pay your bills on-time, keep a diverse mix of credit, and keep the balances low.

3. Pay Down Your Debt

Your debt-to-income ratio (DTI) is also important because it can determine how much home you can afford. It can also play a factor in the terms and rates you will receive. This basically is the total monthly debt divided by your gross monthly income. The goal is to keep your DTI around 43% or below. Lenders would like to see you keep your DTI under 36%. Many say to keep it around 28% that will go towards housing.

4. Save For a Down Payment

The amount you put down for your down payment will depend on the type of mortgage you obtain. An FHA loan has the smallest down payment of 3.5% of the home’s purchase price. If you are dealing with a conventional loan, then you will want to try to put at least 20% down so you will not have to have private mortgage insurance (PMI). A USDA and VA loan will not even require a down payment.

5. Know How Much House You Can Afford

This can be tricky to determine how much you can afford. Remember that this is a big financial commitment for years to come. A good tool is to use an affordability calculator to see how much you can afford. Have your finances in order so you can have a good base for what you can afford in your home search.

When you start a home search, choose a local real estate agent who can help you with the home-buying process from start to finish. They can also recommend a lender who can help you with your mortgage needs.

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The Housing Market Today

 At the end of 2022, the housing market was still weakening due to buyers not being able to afford home prices due to the spike in home prices coupled with the rising mortgage interest rates. NAHB Chief Economist Robert Dietz reported that at the beginning of 2023, the 30-year fixed mortgage rate was down from November 2022 to 6.5% from 7.1%.

NAHB believes that around 18 million households have been priced out of the current market. The decline in affordability is clearly reflected in current housing sales statistics: The volume of existing home sales in November 2022 was 35% lower than in November 2021. The Census data shows that new home sales were down 15% on a year-to-date basis.

Along with the pricing and interest rate comes low inventory. More construction is needed over a long-term period. According to the National Association of Home Builders, their new study reports that the current housing market is underbuilt by 1.5 million homes. Single-family builder sentiment, which is measured by the NAHB/Wells Fargo Housing Market Index (HMI), has been falling every month since December 2021. Unfortunately, this has been the lowest reading they have seen since 2012 and close to 62% of builders are offering some form of sales incentives to entice home buyers.

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MAKING SURE YOU ARE IN GOOD STANDING BEFORE PREAPPROVAL

 Preapproval for a home mortgage can be confusing, especially if you are a first-time homebuyer.  Many homebuyers want to know if they are preapproval ready.  In order to know, here are some things that lenders look for when preapproving someone for a home loan.

Mortgage pre-approval is not a mortgage pre-qualification.  A preapproval is more in-depth than just answering a few questions from your lender.  There is a lot of paperwork involved which includes employment verification, checking records, savings records and investment records.  Lenders nationwide will like for the same elements when pre-approving for a loan. These include a minimum of two-year employment history in the same job or field, a credit score of 620 or higher, a savings track record, financial asses records, proof of down payment  (3% to 20% of home price), and an all-in debt to income ratio fo 43% or less.  The majority of lenders nationwide will not charge for a pre-approval, however, there are some out there that will ask for reimbursement to pull your credit report.

Your job and credit history play a big part in the pre-approval process.  The two year employment rule is very strict.  If you are a current graduate and can prove future income from your employer this will suffice, but if you change from W-2 pay stubs to self-employment this is a no go.

A credit score of at least 620 is also the rule of thumb.  Before you go to a lender to get pre-approved, you can check your credit score for free through the credit unions.  In today’s market, the loan approval for credit scores is every strict.  For a mortgage, the middle score is what counts and is derived from all three of the provideers, TransUnion, Equifax, and Experian.  If you and your partner are purchasing the home together, the worst middle score of the two will be used to determine preapproval.

Another important factor is your assests and downpayments.  “The ability to budget and save shows financial discipline,” says Staci Titsworth, a regional manager for PNC Mortgage in Pittsburgh.  If you received a big bonus, or an intertance, the lender will also have to show the underwriter where the money came from and that it is not borrowed.  Lenders know that life is not perfect and there will be bumps in the road.  Examples include job loss, job changes, and unexpected expenses.  For many of these reasons, people have to dip into their savings to cover these unexpected expenses. In a nutshell you want to be able to have enough info for the lender to explain to the underwriter your financial ability to repay a loan.

Your debt and income ratio is also very important aspect of the process. Lenders desire to see a debt-to-income rati of 43% or less.  If you make $10,000 a month gross before takes, and $4,300 of it goes towards your debt you are okay. This needs to include you future house payment, monthly property taxes and homeowners’ insurance. There is some room to negotiate when it comes to this. Let’s say your DTI is 46% but you have a great credit score and 5% in the bank for a downpayment.  More than likely most lenders would approve you.

Starting the process early is a good idea in case you need to work on some areas to help with your credit, this will give you time to do so.  If you are going to purchase within the next year, then you will want to start looking at getting preapproved now. Note that preapprovals usually are only valid for 60 to 90 days but can be extended if you keep updating with your current financial situation.

If you are in the market to purchase a home, remember to use both a real estate agent and a lender who can help you with all your homebuying needs.  Going to see a home with a preapproval in hand will show that you are a serious buyer.

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Questions a First-Time Home Buyer Should Ask Their Lender

 The current market is definitely a hard one to navigate especially for first-time homebuyers. When purchasing a home for the first time there are so many overwhelming important decisions to make. Here are ten questions to ask your mortgage lender when purchasing a new home.

1. How do I know what type of mortgage is best for me?

There are many options available and finding the right one for you is very important. Your mortgage lender can help you with the process of choosing which mortgage will be best for you. A mortgage lender can help you list the pros and cons of each loan option.

2. What kinds of mortgages do you offer?

There are two major types of mortgages which are conventional loans and government-backed loans. A mortgage lender can help you with choosing the best loan for certain circumstances. They can determine what type of loan you are qualified for.

3. How much should my down payment be?

Usually, a 20% down payment is preferred, especially if you want to avoid PMI (private mortgage insurance). If this is not a figure you can afford, a lender can work with you on the amount you can put down. Depending on what you are approved for, it can be as small as a 3% down payment.

4. What will my interest rate be?

This is usually the first question most people ask a lender. Your interest rate will determine how much you can borrow. There are fixed-rate loans and adjusted rate loans. A 1% difference does not sound like a big difference but it can save you a lot over the lifespan of your loan.

5. Do you offer a mortgage rate lock?

This is important because a rate lock can keep you at a predictable loan cost. This is basically an agreement between you and your lender that the interest rate will not change until closing. If the rates start to rise, this does not matter, you will still get the lower rate.

6. Are there income requirements for buying a home?

There are lending requirements. A lender can help you and they do this case by case with what you will need. It can depend on your credit score and your source of income.

7. Do you offer pre-approval or prequalification?

First, you need to know the differences. Pre-approval means that a lender has verified your income, credit score and assets through documents such as your W-2s, tax returns and bank statements. Prequalification is based on what you tell your lender about your income, assets and credit. Then your loan amount is based on an estimate.

8. What will the costs of closing be?

Closing costs are the fees for processing your loan. These will be paid to the lender. The appraisal fees, origination fees, attorney fees, and title insurance are included in the closing cost. Your lender will provide you with an estimate of closing costs based on the type of loan you go with.

9. What should I do to prepare my financials when considering buying my first home?

There are many things you can do to get your finances in order. Make sure your credit is in good standing. If not, find ways to strengthen your credit. Always determine your budget before you start the process. Do your shopping and compare rates. Always get prequalified before you start looking for a home.

10. Are you doing a hard credit pull on me today?

This is important to ask because a hard credit pull can have an effect on your score. Do not let a lender do a hard credit check until you have agreed to work with that lender.

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Tips to Find the Best Loan for A First Time Homebuyer

There are many different kinds of mortgages to choose when purchasing a home. Not every mortgage is right for you. Here are some tips to follow when choosing which mortgage best fits your needs.
Do your homework. You will want to first research special mortgage programs. There are a great number of programs out there which can assist first-time home buyers. Programs can help with down payments, lower your interest rate or help with other expenses you might have such as a student loan. These programs can help you along the way by allowing you to build equity in your home. Professionals can help with finding the best program to suit your needs, check with your lender or Realtor.

Go with a local. Big programs such as federal programs are more well known but there are many programs for first time home buyers through their city or state. Detroit and Baltimore have used first-time home buyer programs to promote revitalization in their downtown areas. Many states have used

programs to urge first-time homebuyers to purchase their first home in rural areas. Always check your city or state government’s websites to see if there are any programs available to assist you. Another resource would be the community development or housing department.

Don’t overlook your mortgage rate. An obvious focal point is the price of your home. This is not the only thing you should focus on. Your mortgage rate is just as important. This number can tell you how much you will pay in interest every month. The lower the rate, the less you will pay. The easiest way to lower your rate is by a good credit score. Not every first-time buyer has a solid 20 % to put down with an excellent credit score. Many lenders allow you to purchase discount points with can lower your interest rate. Purchasing points is prepaying your interest rate which lowers your overall interest rate by approximately .25%. There are positives and negatives to buying down your rate with discount points. Your lender can help you with this decision.

There’s always an adjustable-rate mortgage (ARM). This can be a great way to start off your first home buying experience. How an ARM works is simple. You will start off with a set period with a fixed rate which will then adjust after a certain period of time. In other words, if you have a 5/1 ARM, you will have a fixed rate for 5 years and then after the 5 years, your interest rate will adjust every year. The rates will not always rise but can also fall. If the rates have gone down you could end up paying less but if it goes up, you will pay more. This is a great way for a first-time to use the first 5 years to improve credit, lower debt and raise your income in order to get a 15 or 30-year fixed-rate mortgage.

Just like an employer interviews for the right employee, the same goes for the right lender. You need to talk to several lenders about getting a mortgage. Shopping around can give you negotiating power and the lowest mortgage rate. You will want to research average rates for your area.

Have your paperwork in order. When applying for a mortgage, your lender will want your monetary life story. Get all your documents together before meeting with a lender. Many lenders will not lock in a rate and start your application until they have all your documents.

Keep your finances the same. Do not make a huge financial change when you are in the process of obtaining a mortgage. Do not apply for a new credit card, get a new car loan, or change jobs. If you do this, the mortgage lender will have to start your application process all over again. You will need to wait even longer to close on your new home.

Getting a loan for a home can be a daunting task but if you do your due diligence, the process will be a lot less painful in the end.

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House-Passed Bill Gives First-Time Home Buyers a Break

We all know that buying a home is a big step for anyone especially for someone who is doing it for the first time. A bipartisan House bill passed at the beginning of July 2019 that will help ease the first time buyer’s anxiety over the home buying process. The bill will allow first-time home buyers to pay less closing cost if they go through homeownership counseling.

“The idea behind the legislation is that counseling should improve loan performance and make people better borrowers,” said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association, which generally supports the bill.

The Housing Financial Literacy Act applies to mortgages backed by the Federal Housing Administration and is a tool that can be used for first-time home buyers. Those eligible, will go

through counseling which teaches them ways to be financially responsible homeowners. Once completed, they would receive a discount on the upfront mortgage insurance that is required on FHA loans.

First-time home buyers tend to go with FHA loans because of the less-stringent requirements. Although the requirements are more lax than a conventional loan it requires more money for insurance premiums because the FHA loan is riskier. Today the delinquency rate on FHA loans is around 9% where the delinquency rate on a conventional loan is only around 3%.

The risk for the lenders on an FHA tends to be higher because a good many of the first-time home buyers using an FHA have low or moderate incomes with lower credit scores. Lenders require those using the FHA to pay mortgage insurance along with an upfront mortgage insurance premium. Currently the upfront amount paid is 1.75% of the base loan amount. If a borrower does not have the money upfront to pay the premium, the cost can be rolled into the loan. The Housing Financial Literacy Act allows a discount of 25 basis points making the premium amount 1.5% of the base loan amount instead of the 1.75%. As an example, the upfront mortgage premium on a $200,000 loan would be $3,500 but with the discount the first-time buyer would only need to pay $3,000.


Hopefully if put into law, the bill will not only help reduce cost, but also give first-time home buyers the tools to become financially responsible homeowners.

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Too Little or Too Much….

When purchasing a home, the majority of homebuyers will purchase using a mortgage. Your credit and your down payment will affect your monthly payment and mortgage rate. The more you put down the lower your monthly payment will be making it easier to build more equity in a shorter amount of time. Although this is a plus, it can back-fire when a homeowner puts down most of their savings on a down payment leaving no funds for home maintenance or emergencies.

“There’s really no one-size-fits-all solution,” says Jason Speciner, a certified financial planner in Fort Collins, Colorado.

Find a happy balance. Figure out how much you can put down to lower payments without leaving the finances high and dry for those upgrades, maintenance issues, life emergencies or life in general. Here are a few pointers to follow when deciding the amount to put down on a home.

Do the benefits outweigh the negatives? Future homeowners are surprised at the differences in the monthly mortgage payments when calculating different down payment amounts. If a higher down

payment would mean a borrower could avoid mortgage insurance this would definitely be a plus. Mortgage insurance is a monthly expense added on top of the monthly mortgage payment making it a much slower process of building equity. There are times when a higher down payment does not reap any benefits. If it leaves a future homeowner strapped for cash it is just not worth it. If someone just needs to put down 3% for a conventional loan but tries to scrape together 5% to lower the monthly payment it just doesn’t make enough difference and cannot be justified if it leaves a future homeowner strapped.

Always be mindful of the effects a higher down payment will have on your financial plan. According to the Bank of the West’s 2018 Millennial Study, 29% of homeowners between the ages of 21 to 34 borrowed from their retirement accounts to make a large down payment on a home. Taking from Peter to pay Paul is not always the greatest solution. Taking money from your 401(k) is definitely risky. If you loose your job, the money must be put back into the 401(k) before the next yearly tax filing or it will be treated as ordinary income with a 10% penalty. An Roth IRA is not as risky, but when taking out money from your IRA you are losing tax-free growth.

Always expect the unexpected. You always want a cushion to fall back on. Leave some cash in the bank for emergencies. Sadly NerdWallet’s 2019 Home Buyer Report, says that 34% of recent first-time home buyers feel they are no longer financially secure after purchasing their home. Homownership includes many expenses that first time homebuyers might not have planned for. Do not drain your savings on a down payment and closing costs.

Speciner says it best, “Emergency reserves are for ‘Oh, shoot’ moments.”


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An Economic Balancing Act

After the fall of the economy in 2007, policymakers want to keep a healthy balance in today’s economy. The Federal Reserve does not want to repeat what some economist consider to be the worst financial crisis since the Great Depression of the 1930s.

According to a statement released by the Federal Reserve, the labor market is continuing to strengthen and the “economic activity has been rising at a strong rate.”

This week Fed policymakers agreed to keep the rates the same for November 2018.  The reason for

this decision was based on the continued growth of the American economy.  The Federal Reserve wants to make sure the growth stays at a healthy rate, neither too fast nor too slow. The benchmark rate, the determining factor for the cost of borrowing on credit cards, mortgages and other loans, will stay between 2% to 2.25%

Markets have gone up this month and the Fed will more than likely raise rates at the final 2018 meeting. This also suggest the rates will raise several more times in 2019. Policymakers explain that this is a standard reaction to the strong economy.  This will give central bankers some cushion if a downturn were to occur.

Not all of the aspects of the economy are at full force. Business investments have risen very little and the investors are curious to see if the Fed officials will anticipate a lower growth in next year’s forecast.

The job market is strong. In October, employers added 250,000 jobs.  Wages have also gone up 3.1% year-over-year. While this is good news for Americans, officials fear that low unemployment and higher wages might speed up inflation which could force the central bank to raise rates aggressively.

What to Know About Researching Your Loan

An article written on a popular website begins with the assumption that you, as the home buyer, are aware that you have the choice to shop your lender.  So let’s start there with the discussion of what you should be learning from the company which is going to be lending you money for what could be the most important investment of your life.

Researching Your Loan

As a home buyer, you have the right to shop your mortgage.  You can and should contact as many lenders, banks, and / or mortgage companies as possible and ask them the costs on application fees, appraisal fees, and the breakdown of your closing costs.  Specifically with your closing costs, you will want to check to see if they are a mortgage broker or if they are the company that has the underwriter who will approve your loan.  A mortgage broker can incur additional fees on top of your loan origination fees. When you contact your lender, you are going to be asking them what their loan origination fees are.  This is a way to “weed out” any unknown loan companies which may have higher fees.

Know Your Title Company

You, as the home buyer, do have some say in the title company that is used by the lender.  The lender works with specific title companies, therefore sometimes gets a better rate that you would as an individual.  However, if you are interested in cross-checking their rates, you can get quotes from title companies as well to make sure that you are not overpaying for those services.

Another big chunk of your closing costs is the cost of your escrow account, if you are doing one.  There is a deposit into your escrow account that is for your taxes and insurance.  If you haven’t yet shopped for the most competitive rate for your homeowner’s insurance, you should definitely do that before you choose your lender or title company.  Your insurance rate accounts for the amount of money that is added to your loan each month in order to pay your annual premium.  The better the rate, the lower the deposit and the lower monthly payment.

On the flip side, you should find out if there are any credits available to you depending on the type of loan that you are getting.  Some lenders are authorized to credit up to a certain amount of money depending on the loan-to-value ratio or the type of loan they are doing. If you are pulling money out of the loan for renovations or to create a home equity line of credit, make sure you get the most amount of money you can at the best interest rate.

Hidden Fees / Down Payment

Once you have done all of your research mentioned above, don’t forget to check with your lender on the following items:

You should find out what interest rates are offered and how much points would be if you chose to “buy down” your interest rate.  Many people don’t know about points, and lenders can sometimes add them into the cost of the loan in order to advertise a better rate to the home buyer.  Make sure that you are getting the base cost of the loan and then the cost of points.  Your lender can break down for you how the cost of points can save you money in the long run by showing how you “pay off” your points and still ssave money of your monthly payments.

Secondly, when you are finding out about the type of loan available to you, find out the specific information about the down payment.  Lending restrictions have loosened up in the last couple of years, so a 20% down payment is not necessarily required anymore to get a loan.

If you are able to obtain a fabulous rate, make SURE to find out exactly when you are required to close if you lock-in your rate in order to be able to keep that excellent rate for closing.  Locking in your rate means, though, that you can’t get a better rate later on, so if you feel like your closing can happen fast, and you have the best rate, go ahead and lock it down to get the most savings.

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