Since the birth of our nation, homeownership has always been considered a major piece of the American Dream. As Frederick Peters reports in Forbes:
“The idea of a place of one’s own drives the American story. We became a nation out of a desire to slip the bonds of Europe, which was still in many respects a collection of feudal societies. Old rich families, or the church, owned all the land and, with few exceptions, everyone else was a tenant. The magic of America lay not only in its sense of opportunity, but also in the belief that life could in every way be shaped by the individual. People traveled here not just for religious freedom, but because in America anything seemed possible.”
Additionally, a research paper released just prior to the shelter-in-place orders issued last year concludes:
“Homeownership is undeniably the cornerstone of the American Dream, and is inseparable from our national ethos that, through hard work, every American should have opportunities for prosperity and success. It is the stability and wealth creation that homeownership provides that represents the primary mechanism through which many American families are able to achieve upward socioeconomic mobility and greater opportunities for their children.”
Has the past year changed the American view on homeownership?
Definitely not. A survey of prospective homebuyers released by realtor.com last week reveals that becoming a homeowner is still the main reason this year’s first-time homebuyers want to purchase a home. When asked why they want to buy, three of the top four responses center on the financial benefits of owning a home. The top four reasons for buying are:
59% – “I want to be a homeowner”
33% – “I want to live in a space that I can invest in improving”
31% – “I need more space”
22% – “I want to build equity”
Millennials believe most strongly in homeownership.
The survey also reports that 62% of millennials say a desire to be a homeowner is the main reason they’re buying a home. This contradicts the thinking of some experts who had believed millennials were going to be the first “renter generation” in our nation’s history.
While reporting on the survey, George Ratiu, Senior Economist at realtor.com, said:
“Americans, even millennials who many thought would never buy, have a strong preference for homeownership for the same reasons many generations before them have — to invest in a place of their own and in their communities, and to build a solid financial foundation for themselves and their families.”
Odeta Kushi, Deputy Chief Economist for First American, also addresses millennial homeownership:
“Millennials have delayed marriage and having children in favor of investing in education, pushing marriage and family formation to their early-to-mid thirties, compared with previous generations, who primarily made these lifestyle choices in their twenties…Delayed lifestyle choices delay the desire for homeownership.”
Kushi goes on to explain:
“As more millennials get married and form families, millennials remain poised to transform the housing market. In fact, the housing market is already experiencing the earliest gusts of the tailwind.”
As it always has been and very likely always will be, homeownership continues to be a major component in every generation’s pursuit of the American Dream.
Mortgage rates are on the rise this year, but they’re still incredibly low compared to the historic average. However, anytime there’s a change in the mortgage rate, it affects what you can afford to borrow when you’re buying a home. As Sam Khater, Chief Economist at Freddie Mac, shares:
“Since January, mortgage rates have increased half a percentage point from historic lows and home prices have risen, leaving potential homebuyers with less purchasing power.” (See graph below):
When buying a home, it’s important to determine a monthly budget so you can plan for and understand what you can afford. However, when you need to stick to your budget, even a small increase in the mortgage rate can make a big difference.
According to the National Association of Realtors (NAR), today, the median existing-home price is $313,000. Using $300,000 as a simple number close to the median price, here’s an example of how a change in mortgage rate impacts your monthly principal and interest payments on a home.If, for example, you’re getting ready to buy a home and know your budget allows for a monthly payment of $1200-1250 (marked in gray on the table above), every time the mortgage rate increases, the loan amount has to decrease to keep your monthly cost in range. This means you may have to look for lower-priced homes as mortgage rates go up if you want to be able to maintain your budget.
In essence, it’s ideal to close on a home loan when mortgage rates are low, so you can afford to borrow more money. This gives you more purchasing power when you buy a home. Mark Fleming, Chief Economist at First American, explains:
“Monthly payments have remained manageable despite soaring home prices because of low mortgage rates. In fact, monthly payments remain below the $1,250 to $1,260 range that we saw in both fall 2018 and spring 2019, but they are on track to hit that level this spring.
Although they remain low, mortgage rates have begun to increase and are expected to rise further later in the year, thus affordability will test buyer demand in the months ahead and likely help slow the pace of price growth.”
Today’s mortgage rates are still very low, but experts project they’ll continue to rise modestly this year. As a result, every moment counts for homebuyers who want to secure the lowest mortgage rate they can in order to be able to afford the home of their dreams.
Thanks to low mortgage rates, the spring housing market’s in bloom for buyers – but these favorable conditions may not last for long. Let’s connect today to start the homebuying process while your purchasing power is still holding strong.
By Gabriel Rodriguez and Daniel Bortz Updated: March 30, 2021 1:36 PM ET | Originally published: March 8, 2021 https://money.com/how-to-get-preapproved-for-a-home-loan/
A mortgage preapproval is a written statement from a lender affirming that you’ve qualified for a home loan under specific terms. With a preapproval, the lender pulls your credit report and examines your documents, so be prepared to provide details about your income, debt, and financial accounts. Read on to learn more about how to get preapproved for a mortgage.
Step-by-Step Guide to Get Preapproved for a Mortgage
If you are starting your homebuying process, a mortgage preapproval letter says how much that lender is willing to lend to you. In other words, you will know how much house you can afford, making your house hunting process easier for you and your real estate agent.
Bear in mind that the letter may have an expiration date (typically 30 to 60 days).
Step 2: Understand the difference between preapproval and prequalification
Both “mortgage prequalification” and “mortgage preapproval” are two key steps in the mortgage application process. Some people use the terms interchangeably, but there are significant differences that you should understand.
Prequalification, or “prequal,” is a cursory overview of your income, assets, debt, and credit by a lender, but you don’t have to provide any paperwork. In other words, the lender is taking your word and, in exchange, giving you a cursory judgment of whether you’ll be approved and for how much.
The lender reviews information, including income and employment history
Requires a credit history check
No credit check
It tells how much you what you can actually borrow
Gives you an estimate of what you can borrow
Sellers frequently require it before accepting your offer
Helpful if your financial situation will change in the future
Getting preapproved for a mortgage carries more weight because it’s a more comprehensive application process (more on that below).
“Sellers would prefer to see a preapproval letter from the lender to know this is a [serious] buyer over a prequalified buyer,” said Nancy Newquist-Nolan, a real estate agent at Coldwell Banker in Santa Barbara, California.
A prequalification can be helpful, though, if you’re just dipping your foot into the water. The process will give you an idea of what size mortgage you may qualify for and help you narrow down the search for your new home. Prequalification may also be worthwhile if your financial situation will change shortly — say, because you’re looking for a new job.
Step 3: Take stock of your finances
Most lenders determine what mortgage loan amount you can get by applying the 28/36 rule. According to the rule, your monthly mortgage payment (which includes property taxes and homeowners and private mortgage insurance) should be no more than 28% or less of your gross monthly income. You should also only spend 36% of your gross income on all your debts, including your mortgage and other recurring debts, such as a car or student loan payments.
For example, if you earn $3,500 a month pretax, your monthly mortgage payment should be no higher than $980, which would be 28% of your monthly income. Some lenders may let you borrow more, but experts say it’s best to avoid taking on a larger payment so that you don’t stretch your finances too thin and risk falling behind on your mortgage.
To avoid surprises, take a close look at your household income, monthly expenses, investment bank accounts, and credit score before applying for preapproval. You’re entitled to a free copy of your report from each of the three major credit bureaus — Equifax, Experian, and TransUnion — at AnnualCreditReport.com.
To determine your eligibility for a mortgage, a lender will want to see your pay stubs, tax returns, W-2 forms, and proof of funds for your down payment. A lender will also do a hard credit check, which will have a small impact on your credit score.
If you’re self-employed, be prepared to provide a two-year history of earnings to show lenders your long-term averages. And if you have a couple of steady paying clients that are the anchor of your business, letters affirming that relationship can’t hurt. If you have your paperwork in order, you can get preapproved quickly. Many mortgage lenders offer preapproval to buyers within 24 hours of a mortgage application submission.
Some online-only lenders, such as Quicken Loans and Better Mortgage, say they offer preapproval in minutes. Preapproval letters are typically valid for 60 to 90 days. Most lenders will allow you to get an extension, but you may need to resubmit some documents.
Step 5: Shop around for the best mortgage lender
Todd Sheinin, chief operating officer at Homespire Mortgage, a lender in Gaithersburg, MD, recommends applying for mortgage preapproval with at least three lenders. (Don’t worry, your credit score will only be hit once.)
If you’re denied a loan, find out why and then take steps to address the issue. You may need to pay off credit card debt or buff up your down payment funds to get preapproved. Some types of loans are designed for low-income homebuyers or first-time homebuyers. VA Loans typically require no down payment.
A no from one lender does not mean you’ll be turned down everywhere, but it is often a sign your finances need some work, and you may not qualify for the best loan terms. Lender shopping can also lead to significant savings.
Usually, you can apply for what’s called a mortgage “rate lock”— a guarantee from a lender to honor a specified interest rate for a set period (typically, 60 to 90 days) — once a seller accepts your offer.
Some lenders will let you lock in a rate once you’ve been preapproved, although you may need to pay a fee to extend the rate lock if it expires before you buy a home.
Step 7: Maintain financial health
A preapproval letter is not a guarantee. The lender can decline to fund the loan if your financial situation or other conditions change before closing. That means it is crucial to avoid extravagant spending and to keep your credit in good shape.
There are some mistakes you’ll want to avoid making after getting a mortgage preapproval. Don’t apply for new lines of credit, make large credit purchases, miss any credit card payments, or co-sign a loan for others — these actions can hurt your credit score, and it can take several months or more to mend your credit.
If you can help it, don’t make any last-minute job changes that would require an underwriter to verify your new job and income, which could delay your loan’s underwriting and force you to delay closing.
Step 8: Put in a bid
Ready to make an offer on a home? Getting a custom preapproval letter from your lender lets the seller know that you are a serious buyer.
It will also give your loan officer a head’s up that you may sign a purchase agreement soon, which can help them prepare for the next steps in the mortgage approval process, such as arranging a home appraisal.
Home Loans Preapproval Checklist
A driver’s license or U.S. passport
A Social Security number or card. If not a U.S. citizen, a copy of the front and back of your green card(s)
Verification of employment
Copy of their credit reports from the three national credit bureaus
Recent pay stubs covering the last 30 days
W-2 forms from the previous two years
Proof of any additional income
Last two years of personal federal income tax returns with all pages and schedules. If self-employed, last two years of individual federal income tax returns with all pages and schedules, as well as a business license, a year-to-date profit and loss statement (P&L), a balance sheet, and a signed CPA letter stating you are still in business
Bank account statements proving that you have enough to cover the down payment and closing costs. If someone is helping you with the down payment, a gift letter stating that the fund is a gift and not an IOU
Last quarterly statements for asset accounts (401(k), IRA, stock accounts, mutual funds)
Mortgage Preapproval: What To Know
What affects your home loan preapproval
Your income and saving are two key factors that lenders will consider during the mortgage process. However, other factors can affect how long preapproval will take and whether or not you’ll be preapproved at all.
Self-employed individuals almost always have a more challenging time getting preapproved. In addition to meeting standard loan requirements, they are asked to prove their line of work and/or the ownership of their business.
Only borrowers who have an ownership interest of 25% or more in a business and are not W-2 employees are considered “self-employed.” However, there is an exception if the borrower can show a two-year history in a similar line of work, which includes having documentation that proves an equal or higher income in the new role compared to the W2 position.
The debt-to-income ratio is the percentage of your monthly gross income that goes toward paying debts. There are two types of DTI that lenders will consider during the mortgage process: front-end and back-end. The first consists only of your housing-related expenses, whereas the latter also includes all your minimum required monthly debts.
The lower your DTI, the better your chances of securing a home loan. Anything over 50% is considered unacceptable by lenders, but keep in mind that the specific DTI requirements will vary depending on the type of loan you’re getting.
For example, FHA loans secured by the government have more lenient requirements — you can have a DTI of up to 57% and still get approved for an FHA home loan. USDA loans used to buy homes in rural areas have a lower maximum DTI of 41%.
The loan-to-value ratio (LTV) is a number lenders use to determine how risky a loan to a potential borrower might be. It measures the relationship between the loan amount and the market value of the property you want to buy, and it can also determine whether mortgage insurance will be required.
All mortgages have a maximum LTV to qualify. However, just like with DTI, the LTV varies depending on the loan. FHA loans, for example, have an LTV of 96.5% since they allow down payments of as little as 3.4%.
Going for an LTV of 80% or less is “ideal” because you get unique benefits as a buyer, but that requires a down payment of 20%. Ultimately, each buyer will need to figure out their own LTV based on how large a down payment they can afford.
Credit History and FICO Score
Your credit history is one of the most important factors when it comes to getting a mortgage.
Type of Loan
Minimum Credit Score
FHA loan with 3.5% down payment
FHA loan with 10% down payment
None, but 620 is preferred
None, but 420 is preferred
You don’t need a perfect credit score to buy a house, but those with outstanding scores are usually rewarded with lower interest rates and a greater variety of payment options. Buyers with very poor credit have the option of finding a co-signer who has better credit than them to help secure the loan.
Why Getting Preapproved Is Such a Big Deal
Getting preapproved for a mortgage helps you shop for homes that you can afford and shows you are a serious buyer.
But a letter of preapproval is more than just a way to look good to sellers. It also helps you find the right mortgage lender and provides some flexibility in bargaining or negotiating for a better price range or specific costs, repairs, and improvements to a home.
Getting preapproved makes the entire closing process faster, too. It takes an average of 50 days to close on a house, and part of that period is due to the process of mortgage approval.
How to Get Preapproved for a Mortgage FAQ
How long does it take to get preapproved for a mortgage?
Getting preapproved can take from as little as three days to as long as three months. It all depends on the health of your finances and how well prepared you are documentation-wise.
Being self-employed or having issues such as a low credit score previous, previous foreclosures, and outstanding debt can elongate the process.
When should I get preapproved for a mortgage?
The best time to get preapproved is right before you start shopping for homes. Letters of preapproval last from 40 to 90 days. If you wait too long to seal a deal with a seller, your letter could become voided. It’s also a good idea to wait to get preapproved until you’re out of debt, have an emergency fund, and can provide a down payment of at least 10%.
Do preapprovals hurt your credit score?
When getting preapproved, a loan officer at a bank or other lending institution will provide you with a detailed review of your finances. This requires a hard inquiry into your credit score, which will lower by a few points. Hard credit inquiries may stay in your credit report for two years, although they typically affect your credit for one year.
Can I get preapproved for a mortgage online?
The preapproval process doesn’t have to be done in person. You can get preapproved online or through a phone call, so long as you have the required documents and financial information. Some companies even have apps now that will let you complete a loan application on your smartphone.
How much does it cost to get preapproved for a home loan?
Many lenders won’t charge you anything for the pre-approval process. Some charge an application fee, which averages from $300 to $400, and may be credited back toward your closing costs — but only if you decide to move forward with that lender.
If you’ve given even a casual thought to selling your house in the near future, this is the time to really think seriously about making a move. Here’s why this season is the ultimate sellers’ market and the optimal time to make sure your house is available for buyers who are looking for homes to purchase.
The latest Existing Home Sales Report from The National Association of Realtors (NAR) shows the inventory of houses for sale is still astonishingly low, sitting at just a 2-month supply at the current sales pace.
Historically, a 6-month supply is necessary for a ‘normal’ or ‘neutral’ market in which there are enough homes available for active buyers (See graph below):When the supply of houses for sale is as low as it is right now, it’s much harder for buyers to find homes to purchase. As a result, competition among purchasers rises and more bidding wars take place, making it essential for buyers to submit very attractive offers.
As this happens, home prices rise and sellers are in the best position to negotiate deals that meet their ideal terms. If you put your house on the market while so few homes are available to buy, it will likely get a lot of attention from hopeful buyers.
Today, there are many buyers who are ready, willing, and able to purchase a home. Low mortgage rates and a year filled with unique changes have prompted buyers to think differently about where they live – and they’re taking action. The supply of homes for sale is not keeping up with this high demand, making now the optimal time to sell your house.
Home prices are appreciating in today’s sellers’ market. Making your home available over the coming weeks will give you the most exposure to buyers who will actively compete against each other to purchase it.
For generations, the homebuying process never really changed. The seller would try to estimate the market value of the home and tack on a little extra to give themselves some negotiating room. That figure would become the listing price of the house. Buyers would then try to determine how much less than the full price they could offer and still get the home. The asking price was generally the ceiling of the negotiation. The actual sales price would almost always be somewhat lower than the list price. It was unthinkable to pay more than what the seller was asking.
Today is different.
The record-low supply of homes for sale coupled with very strong buyer demand is leading to a rise in bidding wars on many homes. Because of this, homes today often sell for more than the list price. In some cases, they sell for a lot more.
According to the Home Buyers and Sellers Generational Trendsreport just released by the National Association of Realtors (NAR), 45% of buyers paid full price or more.
You may need to change the way you look at the asking price of a home.
In this market, you likely can’t shop for a home with the old-school mentality of refusing to pay full price or more for a house.
Because of the shortage of inventory of houses for sale, many homes are actually being offered in an auction-like atmosphere in which the highest bidder wins the home. In an actual auction, the seller of an item agrees to take the highest bid, and many sellers set a reserve price on the item they’re selling. A reserve price is the minimum amount a seller will accept as the winning bid.
When navigating a competitive housing market, think of the list price of the house as the reserve price at an auction. It’s the minimum the seller will accept in many cases. Today, the asking price is often becoming the floor of the negotiation rather than the ceiling. Therefore, if you really love a home, know that it may ultimately sell for more than the sellers are asking. So, as you’re navigating the homebuying process, make sure you know your budget, know what you can afford, and work with a trusted advisor who can help you make all the right moves as you buy a home.
Someone who’s more familiar with the housing market of the past than that of today may think offering more for a home than the listing price is foolish. However, frequent and competitive bidding wars are creating an auction-like atmosphere in many real estate transactions. Let’s connect so you have the best advice on how to make a competitive offer on a home in our local market.
Freddie Mac recently released their Quarterly Refinance Statistics report which covers refinances through 2020. The report explains that the dollar amount of cash-out refinances was greater in 2020 than in recent years. A cash-out refinance, as defined by Investopia, is:
“a mortgage refinancing option in which an old mortgage is replaced for a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get some cash.”
The Freddie Mac report led to articles like the one published by The Real Deal titled, House or ATM? Cash-Out Refinances Spiked in 2020, which reports:
“Americans treated their homes like ATMs last year, withdrawing $152.7 billion amid a cash-out refinancing spree not seen since before the 2008 financial crisis.”
Whenever you combine the terms “spiked,” “homes like ATMs,” and “financial crisis,” it conjures up memories of the housing crash we experienced in 2008.
However, that comparison is invalid for three reasons:
1. Americans are sitting on much more home equity today.
Mortgage data giant Black Knight just issued information on the amount of tappable equity U.S. homeowners with a mortgage have. Tappable equity is the amount of equity available for homeowners to use and still have 20% equity in their home. Here’s a graph showing the findings from their report:In 2006, directly before the crash, tappable home equity in the U.S. topped out at $4.6 trillion. Today, that number is $7.3 trillion.
As Black Knight explains:
“At year’s end, some 46 million homeowners held a total $7.3 trillion in tappable equity, the largest amount ever recorded…That’s an increase of more than $1.1 trillion (+18%) since the end of 2019, the largest percentage gain since 2013 and – you guessed it – the largest dollar value gain in history, to boot. All in all, it works out to roughly $158,000 on average per homeowner with tappable equity, up nearly $19,000 from the end of 2019.”
2. Homeowners cashed-out a much smaller amount this time.
In 2006, Americans cashed-out a total of $321 billion. In 2020, that number was less than half, totaling $153 billion. The $321 billion made up 7% of the total tappable equity in the country in 2006. On the other hand, the $153 billion made up only 2% of the total tappable equity last year.
3. Fewer homeowners tapped their equity in 2020 than in 2006.
Freddie Mac reports that 89% of refinances in 2006 were cash-out refinances. Last year, that number was less than half at 33%. As a percentage of those who refinanced, many more Americans lowered their equity position fifteen years ago as compared to last year.
It’s true that many Americans liquidated a portion of the equity in their homes last year for various reasons. However, less than half of them tapped their equity compared to 2006, and they cashed-out less than one-third of that available equity. Today’s cash-out refinance situation bears no resemblance to the situation that preceded the housing crash.
Right now, the housing market is full of outstanding opportunities for both buyers and sellers. Whether you’re thinking of buying your first home, moving up to a bigger one, or selling so you can downsize this spring, there are perks today that are powering big moves for people across the country. Here are the top two to keep on the radar this season.
The Biggest Perk for Buyers: Low Mortgage Rates
Today’s most compelling buyer incentive is low mortgage interest rates. The 30-year fixed-rate is now averaging just over 3%. While that’s slightly higher than the record-lows from 2020 and earlier this year, it’s still way lower than historic norms, making purchasing a home an ongoing perk for hopeful buyers (See graph below):This is a huge advantage for buyers and helps to make owning a home attainable for more households – and there’s good reason to strive for homeownership. The latest Homeowner Equity Report from CoreLogic shows how homeowners saw major gains in their net worth last year, all thanks to owning a home. Frank Martell, President and CEO of CoreLogic, explains:
“Positive factors like record-low interest rates and a booming housing market encouraged many families to enter homeownership. This growing bank of personal wealth that homeownership affords was noticed by many but in particular for first-time buyers who want a piece of the cake. As a result, we may see more of those currently renting start to enter the market in the near future.”
Low mortgage rates are a plus for buyers right now, but experts forecast we’ll see them continue to rise as the year goes on. If you’re ready to purchase a home, it’s wise to get started on the process soon so you can secure today’s comparatively low rate.
The Biggest Perk for Sellers: Low Inventory
Today, there are simply not enough houses on the market for the number of buyers looking to purchase them, and it’s creating a serious sellers’ market. According to Danielle Hale, Chief Economist at realtor.com:
“Total active inventory continues to decline, dropping 50 percent. With buyers active in the market and sellers still slow to put homes up for sale, homes are selling quickly and the total number actively available for sale at any point in time continues to decline.” (See map below):
The lack of houses for sale continues to challenge the market, and with low mortgage rates fueling buyer demand, homes are hard for buyers to find today. According to the latest Realtors Confidence Index Survey by the National Association of Realtors (NAR), the average house is now receiving 4.1 offers and is on the market for only 20 days.
Buyers are clearly eager to purchase, and because of the shortage of inventory available, they’re often entering bidding wars. This is one of the factors keeping home prices strong and giving sellers leverage in the negotiation process.
Homeowners who are in a position to sell shouldn’t wait to make their move. There’s a light at the end of the tunnel for today’s inventory shortage, so listing this spring will get your house on the market when conditions are most favorable. With low inventory and high buyer demand, homeowners can potentially earn a greater profit on their houses and sell them quickly in the fast-paced spring market.
Whether you’re thinking about buying or selling a home, there are major perks available in today’s housing market. Let’s connect today to discuss how these favorable conditions play to your advantage in our local area.
By Samantha Sharf March 24, 2021 https://money.com/how-to-buy-a-first-home
Madina Gildenberg and her boyfriend relocated from Brooklyn to the Phoenix area in 2014 with the idea that it would be easier to one day buy a home there. Neither had a job when they moved, but they figured they could find work that paid almost as much as they might earn in New York, while the cost of living would be much lower.
By late 2020 Gildenberg had saved enough for a down payment and figured mortgage rates were as low as they would ever be. She was ready. The problem? Her boyfriend was not. He’d recently switched to a lower paying field and hadn’t made as much financial progress. She went ahead anyway, closing on a townhome in Tempe last month.
“I’m the owner. He is the boyfriend,” says Gildenberg, now 27. “This was an important mental switch I had to make. He can’t contribute much at all, so I had to stop waiting for him.”
Plenty of first-time homebuyers can surely relate to Gildenberg’s story. While young people want to own homes just as much as ever, achieving that dream in today’s economy often means re-setting traditional expectations, getting creative and making big financial sacrifices. For many, it means all of the above.
The odds can seem daunting: Last year, the share of first-time homebuyers hit the lowest point in over three-decades, and the average age of homebuyers recently hit 47 — up from the early 30s in the 1990s when most young people’s parents were first buying. At the same time, the number of people at prime starter home age keeps surging, while the number of properties on the market keeps shrinking.
READ THE REST AT: https://money.com/how-to-buy-a-first-home