Buying a home can be a stressful time full of tough decisions and harsh realities. Many people don’t take proper steps before beginning the mortgage application process. This can result in higher rates, more fees, and can overshadow an otherwise exciting step in a family’s life. Taking a few small steps now to plan for a mortgage later could save you thousands of dollars over the life span of a mortgage. There’s no simple way to guarantee the perfect mortgage rate on the perfect house, but there are a few ways you can plan for success:
In December 2015, the Federal Reserve raised interest rates for the first time in a decade. Marking a tentative end to economic aid since the financial crisis of 2008, rates are expected to rise between 0.25 and 0.5 percent. Increases stalled in January after the Fed cited concern over unstable financial markets and global growth, but are still expected to continue their gradual uptick as early as March.
While the news reflects positive U.S. market growth, individuals may feel discouraged in the face of rising rates, particularly where mortgages are concerned. If you plan to buy a home in 2016, you are probably wondering how a federal interest rate increase will affect your bottom line. A few considerations include:
- Account type. The federal interest rate affects different accounts in different ways. According to The New York Times, “Short-term rates will rise by about one percentage point a year for the next three years, Fed officials predicted. Interest rates on mortgages and other kinds of loans, and on savings accounts and other kinds of investments, are likely to remain low for years to come.” The Fed’s decision to raise rates is a cautious one. While you may see a shift in credit card APR, you won’t see a dramatic increase in mortgage rates right away.
- Inflation effects. Although mortgage interest won’t rise at the same rate as credit card APR, the effects of the latter could lead to inflation, a factor which could increase mortgage rates significantly over the next few years.
First-time homeowners and seasoned real estate investors alike often cringe at the idea of all the work and preparation that goes into purchasing a home. Good credit is almost always a requirement for lender consideration, but thanks to a recent increase in interest rates initiated by the Federal Reserve, potential homebuyers will need to be sure they are in good financial standing to qualify for their dream homes. With higher interest rates, competition for mortgages will be steeper and lender requirements even more important.
Federal rate changes have the potential to change how consumers access credit cards, savings accounts and loans of all types, but according to NBC News, homebuyers should not rush into any purchase agreements to take advantage of current rates.
Peter Lazaroff, director of investment research at Plancorp, a financial service firm, advised against hastened decisions, saying, “homeowners should not accelerate or decelerate their purchase decisions based on a market forecast.”
“All markets, including interest rates, are forward looking. That means that debt prices have already built in expectations for slightly tighter monetary policy,” said Lazaroff. …
The real estate market has seen a steady improvement since the housing crash of 2008. As home values increase, many owners are weighing the benefits of selling. Real estate can have a polarizing effect on your credit: a wise investment can lead to greater profits, more options and financial strength. On the other hand, a poor choice can yield the opposite results. Consider the following points as you move forward in the selling process — they will help you make the right decision.
Before selling your home, don’t forget to:
- Create a plan of investment. Selling for selling’s sake may be exciting, but it isn’t the best financial decision. Consider the following example:
Mark and Stella Carson are planning to move across town. They bought their home five years ago for $250,000. A recent uptick in the market means the Carsons can list their home for $289,000. Despite the promise of a profit, the Carsons don’t consider a few key factors:
- Closing costs. Once you’ve paid off your old mortgage, you’ll still need to pay your agent’s selling commission, usually between 5 and 8 percent of the home’s purchase price. In the Carsons’ case, they pay 6 percent, or $17,340.
- Moving expenses. Hiring movers sets the Carsons back $1,200. They own several pieces of furniture that are too heavy to carry themselves. …
With the New Year starting, it’s a great time to reflect on the good times of the past year and make new resolutions. If you are interested in making your dream of owning a home a reality, you will need to know how to improve your chances of being approved for a U.S. home mortgage.
Follow these tips to secure a low interest rate and finally invest in your own property:
Start saving for your down payment
Having a handsome sum of cash to pay for a home up front will increase the likelihood of approval and lower the interest rate on your loan. In addition, if you have more than 20 percent of the entire value of the home up front, you will not need to pay for private mortgage insurance.
If you don’t have 20 percent, Bankrate suggested partnering with Fannie Mae or Freddie Mac for an affordable home loan that matches your current resources. These government-sponsored enterprises allow for down payments as low as three percent of the purchase price of the home. However, you will need a strong credit score to qualify.
Make a plan
If you want to invest in a new home, start saving as soon as possible. Keep an account specifically for your down payment. Do not use the money for anything other than the purchase of your future home.
Determine a budget that allows you to save at a more rapid pace. Cut out frivolous spending and consider eliminating extra costs, such as cable or eating out every weekend.
Organize all paperwork
When preparing to apply for a home loan, make sure you gather all financial paperwork for the two months leading up to purchasing a home. Everything from tax returns to bank statements represents important documents you will need to send to your mortgage broker.
According to Money Under 30, some of the items you will need to be prepared to provide include:
- Monthly income
- Monthly debt
- Down Payment
- Credit history
Consider putting all items in a PDF format so you can easily send these documents to the appropriate parties whenever necessary.
Establish a budget
The size of the loan you are requesting also impacts your approval and interest rate. For this reason, you will need to know precisely what you can afford. According to Money Under 30, it is a good idea to keep your total housing payment under 35 percent of your gross income. This includes insurances, taxes and fees associated with your housing payments.
Consider using a home affordability calculator to help you determine how much you can spend on a new home. The last thing you want to do is default on a payment or lose a new house you can no longer afford to make payments on.
MyFICO indicated that you should always shop around for home mortgage loans. Getting offers from several lenders ensures you are getting the best rate possible for your unique scenario. It makes brokers and banks compete for your business, which typically means more savings for you and your family.
Obtain your credit history
Your credit history serves as a way for banks and mortgage brokers to evaluate your creditworthiness. Someone with a high credit score is more likely to secure a low interest rate for a home loan, while someone with a low score may not be approved at all. Low scores mean they are a riskier consumer, which is not appealing to brokers and banks.
Make sure you request a copy of your credit report so a low score or inaccurate items do not surprise you.
Put credit on hold
If you are looking to invest in a new home, you don’t want to make any substantial purchases or open any new lines of credit. This can impact your score negatively and leave you with a higher interest rate or no loan at all.
Applying for a new line of credit may also look suspicious to banks or mortgage brokers. If you must, draft a letter of explanation to provide to the lender.
Improve your credit score
U.S. News & World Report noted that if you find any errors on your credit score, you should report them. These can negatively impact your score and impede your ability to qualify for a mortgage in 2016. If you have questions about your credit report or how to repair your score, contact Lexington Law Firm for a free consultation.
If your goal is homeownership this year, evaluate your score and make it as high as possible moving into the New Year.
Exercise financial responsibility and make larger payments on your lines of credit. Also, do these more frequently. Making a habit of this now will lead to a more financially successful 2016, and it will bring you closer to your dream of homeownership.
Our clients saw over 4,800,000 negative
items removed from their combined credit reports last year.