The U.S. economy is improving and, with it, rents are rising nationwide. In many U.S. markets, on a monthly basis, it’s more expensive to rent a home than to own one.
Thankfully, the expanding economy has softened mortgage eligibility requirements. Credit score minimums are dropping and banks have become more “common sense” with many portfolio home loan approvals. Plus, current mortgage rates are at a 15-month best.
Looking to buy a home between now and 2015? The market may be ready to help you get approved.
RENTS PREDICTED TO RISE 2X FASTER THAN HOME VALUES
Each month, Fannie Mae polls 1,000 U.S. households for its National Housing Survey. The survey gathers consumer observations on the U.S. economy; and polls for future expectations.
In addition to broad economic themes, the survey covers housing topics including home prices, mortgage rates, and rent.
The most recent survey shows consumers mixed about the future of U.S. housing. Despite rising home prices and falling mortgage rates, confidence in housing is waning from its early-spring peak.
Just 45% of those surveyed expect home values to rise in the next 12 months, a three-tick drop from March. Close to ten percent expect home prices to drop. On average, consumers expect home values to increase 2.1% annually, marking a six-tenths drop from six months ago.
Meanwhile, over the same 12-month period, Fannie Mae survey respondents expect U.S. rents to rise 4.1% percent.
When rents rise faster than home values, it can change the Rent vs Buy equation — especially with mortgage rates near historical lows.
Since 1971, when records were first kept, 30-year mortgage rates have averaged near 8.50 percent. Today’s mortgage rates, by contrast, average 4.10%. Many lenders now quote rates in the three-percent range.
For renters considering homeownership, low mortgage rates help to make homes affordable for the long-term. This is different from rent which often increases from year-to-year.
COMMON MORTGAGES FOR FIRST-TIME BUYERS
For today’s renter, the path to homeownership is simpler and faster than it’s been in more than seven years. There is an abundance of loan programs required little or nothing down, and mortgage credit is available with credit scores as low as 580.
With a 5% downpayment, home buyers get financed via Fannie Mae or Freddie Mac. Loans meeting Fannie Mae and Freddie Mac guidelines are known as conventional loans.
In general, conventional loans are best for home buyers with credit scores of 740 or better, who are buying single-family residences including detached homes and town homes. Loans for homes with 2-4 units; or for buyers with credit scores below 740 are subject to interest rate adjustments which can render a conventional loan expensive relative to other loan types.
Mortgage rates for conventional mortgages are typically higher than a comparable FHA loan, but the mortgage insurance required for a conventional loan is often must less.
For homeowners making a 15% downpayment, 20% downpayment, or more, conventional loans are typically best.
FHA loans are backed by the Federal Housing Administration and require a downpayment of just 3.5 percent, except for certain FHA approved condos which may require up to ten percent due at closing.
FHA mortgages require two type of mortgage insurance premiums (MIP). One type is paid annually, in twelve monthly installments. This type of mortgage insurance is known as FHA MIP. The other MIP type is called Upfront MIP. It’s not paid in cash — it’s added to your loan size.
Buyers with credit scores between 580 and 640 will typically find FHA rates to be the lowest among all available options. Buyers with credit scores between 640 and 740 should comparison shop FHA mortgage rates against conventional ones and, when eligible, VA and USDA loans, too.
VA loans are backed by the Department of Veterans Affairs and available to members of the U.S. military and veterans of the armed services. VA loans are offered as part of the VA Loan Guaranty program and allow for 100% financing with no mortgage insurance required.
VA mortgages offer flexible underwriting and credit access for borrowers FICO scores 620 or higher. VA mortgages can also be used to finance home improvements and energy-efficiency upgrades to a property.
VA mortgage rates are typically lowest among all common first-time buyer loan types.
The USDA loan is backed by the U.S. Department of Agriculture and is available to buyers in areas with medium-to-low population density. This include most rural areas nationwide, and many U.S. suburbs. The program offers no-money-down financing to buyers meeting USDA income limits.
USDA loans require homeowners to pay mortgage insurance, but premiums are much lower than for a comparable FHA or conventional home loan.
USDA mortgages require credit scores of 620 or better, and are available as 30-year fixed-rate mortgages only.