Waiting To Save Up For A House Can Hurt You!
According to the ‘2019 Home Buyer Report’ conducted by Nerdwallet, many first-time buyers still assuming they need a 20% down payment to buy a home in today’s market:
“More than 6 in 10 (62%) Americans believe you must put at least 20% down in order to purchase a home.”
In addition to believing they need 20% down as their parents did, they also tend to think they’ll have to wait years to save up a downpayment. The report continues to say,
“The truth: 32% of current U.S. homeowners put 5% or less down on their home, according to census data.”
As a full-time Realtor, I have lots of conversations with mortgage lenders. So, I asked David Saylor, Senior Loan Officer of Highlands Residential Mortgage, one question, “What’s the most common misconception homebuyers make?”
Dave says, “One big misconception people have is that they need to save a lot of money for a down payment. While on the surface starting out with more equity isn’t a bad thing, it actually could hurt you financially.
He also went on to say, “If your price range is $275,000 and you decide to wait a year to save, with 2% appreciation that same home is now $5500 more. How likely is it that you’ve saved more than that? If you’re paying rent and have normal bills, probably not likely. This isn’t even factoring in a year of paying down the principal balance for that first year.”
The other part of the equation is if there’s an increase in mortgage rates, which is likely. For example, with a 0.75% increase in rate that means a payment today for a $250,000 loan will be equal to a payment for a $221,000 loan with the increased rate.
Factor in the different loan options that require less and in some cases no money down, along with lower rates on Private Mortgage Insurance(PMI), as long as people can afford the monthly payments and have a little bit of back up money in the Bank, it usually doesn’t make sense to wait.
Another misconception is with credit, people try to “fix” their credit on their own before having an experienced Lender look at it. Often times they don’t do the right things and just lose time this way. I good Lender will look at your credit and advise you on the proper steps to take, even if the process could take a year or so.
[Tweet “Living debt-free is not a viable solution when credit history plays a critical role in qualifying for a home mortgage.]
For example, many people get in trouble with debt then decide to close everything out. Problem is, your credit can’t recover if you don’t show a history of making consistent payments. Ideally, you want 2-3 tradelines that report every month.
There are a lot of things to look at as far as credit is concerned, this is where a good Lender, willing to take the time, comes into play. Using a special credit assimilation program, they’ll go over your current credit scores with you and show you which credit cards to pay down and how doing so, can dramatically improve your credit score.
I’ve been through this myself and the information is a real eye-opener when you realize that you only need to pay down the right cards and see how dramatically it affects your credit. Another “Aha” moment was realizing that I didn’t have to pay any of them off but rather just pay a little extra was all that was required.
This is definitely worth the time with a good lender. So shop around until you find the right one. Keep in mind, that not all lenders have this program.
What Do You Need To Qualify For A Loan?
It’s easier than you think to qualify for a mortgage today and way easier than it was for your parents and grandparents. Back in the 1970’s home buyers were paying up to 18% interest rates. Fast forward to today and interest rates dropped again for the third time in the Fall of 2019.
Most homebuyers like you only need 3% as a downpayment and there are lots of programs out there willing to provide you with a downpayment and help with your closing costs too!
What else do you need? A stable income, and decent credit history. Once you’re ready to apply, here are five easy steps Freddie Mac suggests you follow:
Get a handle on your current credit history and score– Even if you don’t have perfect credit, you may already qualify for a loan. Many lenders will work with home buyers with credit scores of 630 and up. On average, FICO Score® for all closed loans in September was 737, according to Ellie Mae.
Documentation– This will include income verification (W-2 forms or 1099s), credit history, and assets (bank statements) to verify your expenses and savings.
Contact a professional– Your real estate agent will be able to recommend a loan officer who can help you develop a spending plan, as well as help you determine how much home you can afford.
Consult with your lender– He or she will review your income, expenses, and financial goals in order to determine the type and amount of mortgage you qualify for.
Talk to your lender about pre-approval– A pre-approval letter provides an estimate of what you might be able to borrow (provided your financial status doesn’t change) and demonstrates to home sellers that you’re serious about buying.
Saving 3% Down Takes No Time At All
Using data from HUD, Census and Apartment List, Keeping Current Matters, an analysis and real estate market information platform, determined how long it would take for a first-time buyer to save 3% for a down payment on their dream home.
By determining the percentage of income spent renting in each state, and the amount needed for a 10% down payment, they’ve established how long (in years) it would take for an average home buyer to save enough money to buy a home of their own.
If you can take advantage of one of Freddie Mac’s or Fannie Mae’s 3%-down programs, buying your new home becomes attainable in less than a year, in most states, as shown below.
For instance, in states like Michigan, Ohio, Wyoming and along with some midwest and east coast states (in dark blue) the chart indicates that saving just 3% for a down payment can be accomplished in 9 months or less.
Downpayment money is out there waiting for you to take advantage of it. Many homebuyers are often surprised to find there are up many downpayment assistance programs. Since I’m in Michigan, I share a link where my homebuying clients can check to see which programs are available by entering the address of the property you’re considering purchasing. Many of these programs do not require high credit scores at all.
For instance, a few of the downpayment assistance programs in Michigan include:
Michigan State Housing Development Authority (MSHDA) MI Home Loan Down Payment Assistance (DPA)
2nd Mortgage, up to $7,500 assistance
Michigan State Housing Development Authority (MSHDA) MI Home Loan Flex Down Payment Assistance (DPA)
2nd Mortgage, up to $7,500 assistance
Chenoa Fund – Conventional 97 HomeReady Program
Combined Assistance, up to 3% of Value in assistance
Chenoa Fund – Conventional Standard 97 Program
Combined Assistance, up to 3.5% of Price in assistance
If you’re looking in Michigan, use this link to see how many programs your property of choice can qualify for.
Freddie’s 4 C’s
Freddie Mac describes the ‘4 Cs’ that help determine the amount you will be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings, and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
Do Go It Alone
One of the many benefits of working with your local real estate professionals is that many of them have relationships with lenders. They can offer up a list of recommended lenders to choose from who will be able to help you through this process.
Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”
Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted.
Your Two Cents
My hope is that if you’re thinking of purchasing a new home you’ll feel far more encouraged knowing you can, in fact, purchase with as little as 3% down. Here’s your opportunity to ask questions or leave a comment.
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Hey, let’s meet up on Pinterest. I’ve made it super easy for you too! Just click on the image below and you’ll be taken to one of my boards devoted to buying a home, the right way. See you there!