In the current marketplace, many people have questions about qualifying for a mortgage, interest rates, and credit scores. Today, a panel of experts assembled by realtor.com answered some of our users' top questions to help them get ready to buy a home.
The panel members were:
Leslie Piper: A Realtor who serves as realtor.com's consumer housing specialist
Jonathan Smoke: Chief economist of realtor.com
Tracy Mahnken: Senior vice president of Move, Inc., which owns realtor.com
Michael E. Matthews: Senior vice president of PrimeLending
Here is an edited version of the top questions and our panelists' responses. You can also watch the full replay here:
Q: What different loans are out there to buy a home?
MM: There's a bunch of different options, with not as much down payment as you'd think.
JS: It's sort of like you're shopping for breakfast cereal -- it could be that you're going down the cereal aisle at a super Wal-Mart, but it could be that you're stuck with just the cereal boxes that are at 7-Eleven, because it's all dependent on where you live, the property you're buying and, of course, your personal financial situation.
The best way to cut through that, and get the right box for you, is to talk to a local professional.
Make sure you look at how long you expect to be in the house. A lot of people just default to the 30-year fixed (mortgage). You're really trading off the interest rate, and that is an important factor in qualifying and what you're going to pay. Sometimes you might be better off with a shorter-term mortgage.
MM: The first time we speak [to a new customer], those are the questions we're going to ask. We want to understand how long you're going to live there and what makes sense for you.
TM: Realtor.com has this great tool, the rent vs. buy calculator, that allows first-time home buyers to explore, if they were to buy a home, how many years it would take for what you're paying on a mortgage on your home to be equal to, or maybe less than, what you're paying in rent.
Q: If you are buying a home for the first time and don't have 20% to put down, is there any way you can avoid PMI?
JS: Private mortgage insurance … applies when a consumer puts less than 20% down on a loan. The reason for that is that loans, historically, that have less than 20% down have higher default rates. So there's risk there that literally has to be accounted for, and that ends up being insurance that adds to your mortgage payment.
When you put less down, the trade-off is gonna be, you actually have to spend more on a monthly basis, and that's going to impact your qualification.
Let me play a simple scenario from an economics perspective:
Let's assume you're the median-income household in the country today and you're buying today's median-priced home, which is about $205,000. If you finance that 20% down with a 30-year fixed-rate, it would take about 26% of your income. So you would qualify, assuming everything else in your history is good, and you would be able to afford that, because it's under the 28% threshold (the ratio of your housing payment to your income) that is a good guide for affordability and for qualification.
But if instead you needed to opt to pay just 3.5% down and to go with an FHA-insured, low down-payment option, you'd end up having to spend 33% of your income to cover the insurance and the higher monthly payment expense. You wouldn't qualify anymore.
The trade-off of having a lower down payment might mean a different kind of home, a cheaper home. So see if you can, by looking at a different kind of home, put more money down. But I know that doesn't apply to everybody.
MM: There are many ways to avoid private mortgage insurance. You could do a first mortgage, where part of the lien is in first lien position, and you could do a second mortgage to avoid mortgage insurance. There's also lender-paid mortgage insurance, where you take a little bit higher of an interest rate, but then you'll be able to write that off on your taxes. All of these things seem complicated, but that's what we're going to cover with you the first time that we speak.
TM: For buyers who are in the military, or veterans, or family of veterans, it's absolutely worth exploring what the Veterans Administration offers in terms of a VA loan. One of the key attributes of a VA loan is no PMI.
MM: And a very light down payment.
Q: If you don't have any credit history, what documents do you need in order to get a mortgage?
MM: There are ways to verify payment on utility bills, cellphone, your rent. It's also important to note this is where you start establishing your credit.
If you don't have anything on your credit report, it's not bad, but we can't tell how you're going to pay back your loan.
Get a credit card, pay it back carefully. Your car loans -- those things help you establish credit and help you get a mortgage.
LP: Opening a credit card is a great first step, just be responsible.
TM: Younger folks who are thinking about preparing to get a loan really need to stop and think about it. You may not feel you need credit, or need a credit card while you're still in college or when you've just moved out, but it takes time to build up your credit history.
Q: If you have bad credit, what are the best things to do to improve it?
MM: We talk to a lot of borrowers who think they have bad credit, and a lot of times that's not the case. So the very first thing we're going to do when speaking with a customer is, we're going to run their credit and see what they've got.
If you've got bad credit, a lot of times there's aged activity on there -- an old collection, a medical bill, something you didn't know about. You want to have somebody advise you and look at your credit and make recommendations. There's also different credit-monitoring services where you can get your free credit report and also be alerted to any fraudulent activity. You need to know what's going on with your credit.
LP: And aren't you able to get a credit report once a year, and it won't affect your credit?
LP: There's a lot of individuals out there who are hoping to be able to buy a home, but they know that they have bad credit or they're afraid that they do -- you just need to go and check.
TM: And when you run your credit report each year, don't just look at the number, the score. Take a quick look at what's on it; you'll be surprised. There may be some auto loan that you paid off 15 years ago but for some reason it's just lingering, and an hour or so spent on the phone can clean these things out of your credit report.
It's kind of like spring cleaning -- tidy it up every once in a while.
JS: One of the factors that impacts your credit rating is your total debt-to-credit ratio.
Let's say you have three credit cards, and you have a $5,000 level of credit on each one. That's $15,000 total (available) credit. But if each month, you spend $5,000 on one card and you pay it off each month, from a credit standpoint you've used a third of the credit available to you and that starts to look like a risk.
So knowing your credit ratios and paying down the debt that appears when you apply can help your score.
Q: Where do you see mortgage rates going this year?
JS: There's no question that rates are going up. The key question is how much, and when are we going to see firm rates that are no longer going to dip back down on occasion.
We're forecasting we could see as high as 4.875% by the end of the year. I looked at all the current major economists' forecasts, and you've got an enormous range, from 4% on the 30-year fixed to almost 5% on the 30-year fixed.
If you understand what each percentage point means to you, that can have an enormous impact on what you can qualify for.
The other thing I would say to make sure you're expecting in this market is volatility.
Rates are bouncing up and down daily, so if I were looking for a mortgage this year I would learn a couple of key words: a lock and a float-down.
MM: At PrimeLending, we do have a float-down, so that if during the process of your loan, if rates do drop prior to closing, you can float that down to a lower rate. Locking in -- I wouldn't wait.
TM: Those rates are custom to where you are, and on the realtor.com mortgage app you can put in the ZIP code of the area where you're looking to buy, and you'll be able to watch the rates over time.
JS: It's like shopping for gas; every station has a slightly different price.
Q: What's the difference between a pre-approval and a pre-qualification?
MM: Pre-qualification is not going to hold the same weight as a pre-approval. You can go online and get somebody to print you out a pre-qual letter. And you'll find that if you're negotiating with an agent and they're looking at a pre-qual letter, it's probably not worth as much to them. A pre-approval letter, we're actually taking a look at your full situation. We're providing a letter that's stating that based on what you've provided and that we've validated, you're approved for a loan.
LP: In today's marketplace, especially what we're seeing here on the West Coast, we're having multiple offers. And you absolutely have to be pre-approved and have a current letter.
Q: What kind of down payment assistance is available?
TM: Know that there is such a thing as down payment assistance. You should absolutely ask your Realtor about it, ask the lender that you might be working with.
There are two major forms of down payment assistance:
There are some programs that are about you as a borrower, that will evaluate your personal situation, your history. It could have something to do with the industry that you are in, things like that.
There are other programs that have to do more with the property you might be interested in. So, for example, a city might be sponsoring some urban redevelopment, they may have taken out some old tenement apartments, built some new-construction condos, and they've got a great down-payment assistance program that is designed to bring in families.
MM: We see mortgage credit certificates. We see first-time home-buyer programs, and they're not always advertised on the wall. Having that local agent, or a lender who knows what's going on in that community, makes a difference.
JS: Don't forget the Bank of Mom and Dad. You can qualify for a lot of mortgages with gifted money, but you need to be upfront with your lender about that, so that they make sure the program that you're interested in will work.
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