Should I Buy Or Should I Rent?
With current interest rates near six-month lows and rising rents in many U.S. cities, the math of “Should I Buy Or Should I Rent?” is changing.
Demand for newly-built homes is its highest since before last decade’s housing market downturn; and the supply of homes for sale suggest a “seller’s market”.
Competition is forcing today’s home buyers to get more aggressive with their purchase offers, and the 2016 Housing Market may be more competitive.
One way a buyer can “stand out” versus the competition is by having more information than the next guy.
An informed buyer is a smart buyer, after all, and there are some key areas in which today’s buyers can distinuguish themselves — especially where home mortgages are involved.
Unless you’re paying cash, be familiar with the mortgage loan process, how credit scores work, and how to make a downpayment. Knowing today’s mortgage rates will help you out, too.
Pre-Approvals Are The “Gold Standard”
When home sellers evaluate purchase offers for their homes, one of the first questions they ask their real estate agent is: “Can this buyer get approved for a mortgage to buy my home?”
As a buyer, then, your first task should be to remove that doubt completely. And, thankfully, there’s a tool to help you do it — the pre-approval letter.
A pre-approval letter is a written document which verifies a buyer’s ability to purchase a specific home at a specific price.
Lenders provide them at no cost and can modify the letters to suit all of the homes on which you plan to make an offer.
Pre-approval letters are the Gold Standard for making sellers feel comfortable and confident that your bid for their home is a good one.
What Happens During Pre-Approval?
The pre-approval process is a little more in-depth than “getting a rate quote” from a bank.
Lenders typically begin your pre-approval by collecting information about your residential, employment, and financial history.
As part of this step, your credit report gets integrated into your profile so lenders can verify your debt-to-income (DTI) ratio — a key mortgage-approval data point.
Next, the lender will ask about specific properties in which you’re interested and their list prices. It may also request MLS listing sheets for each home in order to incorporate actual real estate tax information and hazard insurance figures in your approval.
Then, with this information handy, the lender will “mock-underwrite” your mortgage, which simulates underwriting for your actual mortgage approval.
It will then request supporting paperwork to verify that you meet the minimum requirements to gain mortgage approval.
The pre-approval process can be completed within an hour and, in contrast to getting “pre-qualified”, which skips all of the required verifications, pre-approvals are proof that you can, in fact, get mortgage-approved for a specific home.
Home sellers prefer buyers who come pre-approved. Pre-approvals help your offer to stand out.
Can You Get A Loan With FICO Scores Under 740?
Your credit scores will play a large role in your mortgage approval, affecting your mortgage rate, your downpayment requirements, and your ability to access specific loan programs such as the Conventional 97, the FHA loan, and for military borrowers, the VA loan as part of their VA benefits.
In general, the higher the credit score, the easier it is to qualify for a mortgage. Higher credit scores are also linked to better rate quotes.
For example, with a conventional loan, the lowest mortgage rates are available to prime borrowers, who are identified by having a credit scores of 740 and higher, among other traits.
The mortgage rate difference between having a 740 FICO score and a 700 FICO score for a conventional can be as much as 50 basis points (0.50%). This is one reason why borrowers whose credit scores are below 740 sometimes prefer an FHA loan or a loan via the USDA.
Neither loan type penalizes borrowers for having credit scores below 740.
Lenders will review your credit scores as part of the pre-approval process. When they “pull your credit”, they’ll see your scores and your credit history.
Missed payments, late payments, and tax liens, for example, can create hurdles for your lender. Low debt utilitization can represent strength.
If you don’t know your current credit score, consider using free services such as credit.com which list your active and closed credit accounts; and your history with those accounts. Credit reporting mistakes can negatively affect your score, which can negatively affect your chances to get a home loan approved.
Strength in your report can work in your favor.
Saving Up For A Down Payment?
When we talk about homes, down payments matter, too.
A “down payment” is the amount of money paid at closing toward purchasing a home, irrespective of closing costs; it’s the amount of equity you’re putting into your new home.
The size of your down payment, as a buyer, is entirely up to you — so long as you meet the minimums required by your loan type.
Four of the most common loan types are conventional loans, FHA loans, VA loans, and USDA loans.
Some loan types require no downpayment whatsoever (e.g.; VA loan, USDA loan), and others require a downpayment of 25% down or more (e.g.; Rental home purchase with more than 4 properties already financed).
You don’t often need to put 20% down to purchase a home, but the larger your down payment, the less money you borrow from the bank, and the smaller your monthly mortgage payment will be.
So, to get a smaller mortgage payment, increase the size of your down payment — you can test idea this with a PITI mortgage calculator. But, be aware of how much money you’re using from savings to apply toward your home.
It’s fine to make a large downpayment, but try to avoid becoming “house poor”, which means to have lots of assets tied up in home equity and few assets available as cash.
Being house poor can be a hardship to your household should income drop unexpectedly because of job loss, injury, or sickness, as examples. Being house poor can also affect your ability to save for retirement.