5 Things to Know if You’re Trying to Get a Mortgage With Bad Credit in 2017

hopping for the right mortgage lender is key to getting the best loan terms, especially if you have less-than-stellar credit.

Believe it or not, your credit doesn’t have to be stellar to get a mortgage. Many banks and lenders will extend a mortgage to applicants with at least a 640 credit score. However, not all lenders are created equal — and, even if you can score a home loan, bad credit is going to seriously cost you in interest.

What Credit Score Do I Need to Get a Mortgage in 2017?

There are two main types of mortgages: conventional and Federal Housing Administration, or FHA, loans.

Some lenders will offer conventional mortgages to consumers with a credit score of just 620. Other lenders will go even lower, but the process for getting that mortgage will be difficult and involve thorough explanations of your credit history.

For FHA loans, some lenders will go as low as 580, with just 3.5% in equity. However some folks can get a new mortgage or even do a cash-out refinance with a credit score as low as 550 — but there’s a catch. You’ll need at least a 10% equity position. This means you need 10% down when buying a home or 10% equity when refinancing.

Keep in mind, though, not all lenders will extend a mortgage to someone with a bad credit score — it has to do with their tolerance for risk. (From an underwriting perspective, poor credit indicates a higher risk of default.) The more risk a bank is willing to take on, the higher your chances of getting approved with a not-so-hot score. You can see where you currently stand by viewing your two free credit scores on Credit.com.

Here are some things to keep in mind if you have a low credit score and are shopping for a mortgage.

1. It’s a Good Idea to Rebuild Your Credit

If you are looking to increase your credit score to have an easier time getting a mortgage, you’ll need to be able to clear the 620 mark to see any significant difference. Hitting that threshold (and beyond) will likely make better mortgage rates and terms available to you, plus keep you from going through the type of scrutiny a lower tier credit score bracket often requires. You can generally improve your credit score by disputing errors on your credit report, paying down high credit card balances and getting any delinquent accounts back in good standing.

2. Down Payment Assistance Will Be Hard to Come By 

Down payment assistance programs are currently quite scarce. Beyond that, to be eligible for down-payment assistance, a borrower would typically need at least a 640 credit score. You can expect this across the board with most banks and lenders. It is reasonable to assume you are ineligible for assistance if your credit score is under 640.

3. Previous Short Sale, Bankruptcy or Foreclosure Are Subject to ‘Seasoning Periods’

If you have one of these items on your credit report, it’s going to impact your ability to get a mortgage. There’s typically a three-year waiting period — also known as a “seasoning period” — before you can qualify for a mortgage after you’ve been through a foreclosure or short sale. The waiting time after a bankruptcy is two years. Note: There are some loan programs that have shorter seasoning periods. For instance, VA loans can get approved at the two-year mark following a foreclosure.

4. Higher Debt-to-Income Ratios Make it Harder

It’s no secret that FHA loans allow debt-to-income ratios in excess of 54%. In order to be eligible for this type of financing, your credit score should be around 640 or higher. That’s not to say your credit score of 620, for example, will not work. It’s almost a guarantee, though, that if your credit score is less than 600 you’re going to have a difficult time getting a loan approved with a debt-to-income ratio exceeding 45%.

5. Cash-Out-Refinancing Is On the Table

This is a big one. If you already own your own home, you could use your equity to improve your credit. How? You could do a cash-out refinance with your home. This would allow you to pay off installment loans and credit cards, which often carry a significantly higher rate of interest than any home loan. Wrapping them into the payment could end up saving you significant money, and it’s still an option for borrowers with lower credit scores. (As I mentioned earlier, some lenders will do a cash-out refinance for borrowers with a credit score as low as 550, so long as they’re in a at least 10% equity position.) However, if this is something you’re considering, be sure to read the print and crunch the numbers to determine if you’ll come out ahead. Cash-out re-fis require you to pay closing costs and your bad credit might not merit a low enough interest rate to make this move worthwhile. You’ll also want to make sure the new monthly mortgage payment is something you can handle.

Remember, just because you can technically get a mortgage with bad credit, doesn’t mean it’s the best move for you. You may want to improve your standing, lower your debt-to-income ratio and bolster your down payment funds before hitting up the housing market. Still, it can be done and if you’re currently looking for a home loan, be sure to ask prospective lenders or mortgage brokers lots of questions to find the best deal you can get. To help you through the process, good credit or bad, here’s 50 full ways to get ready for your house hunt.

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The Fastest Way to Save for a House

There are a few ways to expedite that down payment.

Once you’ve decided it’s time to buy your own home, saving for that 20% down payment is step one toward doing it. Instead of waiting years, here are six ways to help you save up for that down payment in a matter of months.

1. Explore the Market

If you are saving money to buy your dream home, consider taking a detour through a lower-priced neighborhood first. Buying a lower-cost home means you won’t have to save as long for the down payment. As the home’s value goes up, you can use the equity you’ve built to help you get into a higher-priced home later on, particularly if you find a fixer-upper and you’re good at repairs.

2. Keep Your Priorities in Focus

While it may be tempting to put off other priorities when trying to save for an important goal, Kevin Gallegos, vice president of Phoenix operations at Freedom Financial Network, says paying the rent should always be your first priority. Next, Gallegos says, pay down credit card debt.

“Few, if any, investments will return as much,” he explains. Additionally, having more available credit on your card will improve your debt-to-income ratio and creates a financial cushion that you may need for unexpected costs after moving in to your new home.

3. Automate Your Savings

You can create a budget based on your current expenses to determine how much you can save each month. Once you have determined how much you can afford to save, automatically transfer that amount from your checking account to a savings account.

“Save before you ever have the money in your hand,” Gallegos says. “Record this expense like a bill every month.”

4. Generate More Income

To raise money quickly, Gallegos says it pays off to turn your spare time into money-making opportunities. Look around your apartment for unneeded items to sell online or have a yard sale.

“Even small proceeds can accumulate surprisingly quickly,” he says. “Maybe you have skills where you can turn a hobby into a part-time, money-making enterprise. Babysit, tutor, do yard work or other part-time work.”

5. Track Your Daily Expenses

Before pulling out your wallet, ask yourself how badly you need to buy something. For example, if there is free coffee at work, do you really need to go to the coffee shop every morning? Gallegos admits it sounds cliché to ask such questions, “yet this is just the type of disciplined act that will get someone on track to saving as much as possible as quickly as possible,” he says.

To further reduce daily spending, Gallegos recommends paying with cash instead of using a debit or credit card. “Many studies report that people spend up to 15 to 20% less when paying with cash,” he says.

6. Reduce Household Expenses

There are many ways to reduce monthly expenses at home that can help build your savings for a down payment more quickly. Washing clothes in cold water saves up to 90% of the energy expended in the washing cycle, notes Gallegos. Switching to cold water will directly reduce next month’s utility bill. Plus, speaking of laundry, skip the dryer. That’ll eliminate carbon emissions and help you bank away extra dollars, he adds.

You should also eliminate drafts in your home and turn the hot water temperature down to 120 degrees, which will save you money. Per EnergyStar.gov, a house’s water heater “can waste anywhere from $36 to $61 annually in standby heat losses and more than $400 in demand losses.”

Implementing only one of these ideas may not increase your savings significantly, but if you try a few of them, it can make a real difference to your savings account after a few months and get you on the right track to having enough for your new home.

[Editor’s Note: A good credit score can make buying a new home more affordable, too, since it’ll help you qualify for a low interest rate. You can see where your credit stands by viewing two of your scores for free on Credit.com.]

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Do You Need a Jumbo Down Payment for a Big Mortgage?

Having a big chunk of cash to put down on a house is nice, but it's not always required.

Most people will say you need to have excellent credit and a big down payment in order to secure a large mortgage. The reality is that while having a big chunk of cash to put down on a house is nice, it is not always an absolute requirement. Here’s what you should know if you are looking to take on a large mortgage.

Can I Get a Large Mortgage With a Low Down Payment?

It depends on where you live and how large we’re talking. Any Federal Housing Administration or FHA loan up to the maximum county loan limit can qualify for only 3.5% equity in down payment. Bonus: Back in December 2016, the FHA approved higher loan limits beginning in January 2017 for many counties across the country.

Another program known for having low down payment requirements are VA loans. VA loans are available to veterans, active duty service members, National Guard members and reservists who meet the requirements of the Department of Veterans Affairs and have acquired a Certificate of Eligibility from the VA or their lending office. VA loans will also go up to the maximum county loan limit and can even go up to or over $1 million in home values.

The idea that you need a big down payment in order to secure a larger mortgage is simply not true. FHA loans do require mortgage insurance premiums, and VA loans have a guarantee fee, which will increase your closing costs. However, your down payment will remain minimal.

What’s a Jumbo Mortgage?

Jumbo loans exceed the maximum county loan limits and are not bought and sold every day to Fannie Mae and Freddie Mac. That said, jumbo loans do require significantly higher credit scores, typically 700 or above, and at least 10% equity in down payment. Keep in mind that any loan with less than 20% equity in the property will be subject to private mortgage insurance. (Not sure where your credit stands? You can view two of your credit scores, with updates every 14 days, for free on Credit.com.)

Jumbo mortgage requirements are particularly relevant for those looking to buy a home in high-cost areas. For example, in California’s Sonoma, Marin, San Francisco, and Alameda counties, the maximum loan limit ranges anywhere from $595,000 to $729,500, but there are home that easily go for well over that.

How Can I Put Together a Down Payment?

Acceptable sources of down payment funds can include:

  • Gift funds from a relative
  • Selling of personal property that can be documented and supported by third-party value pricing (i.e. Kelly Blue Book for a car sale)
  • Withdrawals from retirement funds

Remember, you cannot use your income as a form of assets. Banks want to see that you have the ability to save money up on your own. For example, you cannot use money from your paycheck that you deposited five minutes ago as a down payment because the funds are not considered “seasoned.” In order for these funds to be considered, they must have been in your accounts for at least 60 days to show the money was “saved.”

Struggling to put together a down payment? You can find more ways to find extra funds here.

As always, if you are looking to buy a house, be sure to do some research beforehand. Figure out how much cash you really have by working with a lender and seeing what you qualify for now. Be sure, too, to carefully research how much house you can actually afford — and what a comfortable monthly mortgage payment would be. Also, work with that lender to develop a savings plan so you can qualify for your first mortgage or improve your current mortgage and financial situation.

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Trump’s Mortgage Fee Cut Reversal: What it Really Means for House Hunters

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Almost lost amid all the celebrating and marching this weekend were a set of official actions the Trump administration took soon after the Inauguration. One directly impacts some consumers who are house-hunting right now.

You might have seen headlines suggesting President Donald Trump raised taxes on middle-class homeowners, but that’s not an accurate way to portray what happened. Instead, Trump signed an administrative order to halt a fee rate cut, announced just days earlier by the Obama administration, that would have saved homebuyers who don’t have big down payments and use Federal Housing Administration-backed home loans an average of about $450 annually in their monthly house payments.

The order will make home loans more costly for a large group of buyers — about 40% of millennial buyers use the program targeted by the Trump order. That, in turn, can make life harder on older owners looking to sell their homes and trade up.

What Really Happened

In the hours after he was sworn in, Trump signed an order that stopped a lame-duck step by the Obama administration that would have lowered monthly fees for consumers who buy homes with less than 20% down payments and use a government program operated by the Housing and Urban Development department known as “FHA loans” to insure their mortgages. The decrease would have saved average homeowners about $37 monthly, according to Attom Data Solutions. It would have saved homeowners much more in places where home prices are higher — averaging more than $1,000 annually in 13 counties across the United States.

FHA loan fees were raised during the recession to cover program losses, and Obama’s move would have returned them to about the level they were before the housing bubble burst. For now, they remain above their 2008 levels.

Keeping the fees higher effectively lowers the buying power of home shoppers, as money that could be spent toward mortgage payments is instead shifted to insurance payments.

Help For Less-Liquid Homebuyers

Many homeowners are familiar with the additional fees that come with low-down-payment mortgages. Buyers with less than 20% generally must pay for mortgage insurance in case they cannot make their mortgage payments. That’s because the owners will have so little equity in their homes that banks can’t be sure they’d make their money back if they foreclosed on the home and sold it.

There are several forms of this kind of insurance; the most popular is provided by the Federal Housing Administration through FHA-backed loans. For an upfront fee and an ongoing monthly cost, the FHA will guarantee a loan between a buyer and a bank — that gives banks the ability to lend money to buyers with as little as 3% down.

The program dates back to the 1930s, and helps create first-time homebuyer activity. The FHA has insured 34 million properties since its inception, and the agency says it is the largest insurer or mortgages in the world.

Low-down-payment buyers can opt for private mortgage insurance, or PMI, instead. PMI tends to be less expensive, but buyers with lower credit scores or smaller down payments might not qualify for it.

Without these kinds of insurance programs, a buyer shopping for a median-priced $185,000 home would need at least $37,000 in a cash down-payment to buy a home, or would be required to finance the down payment some other way.

Younger Buyers Could Be Hit Hardest

FHA loans are particularly popular with millennials; 38% of new loans closed by younger buyers are FHA loans, according to mortgage data firm Ellie Mae.

FHA insurance isn’t cheap. At closing, buyers pay 1.75% of the loan in an upfront fee. For a $185,000 mortgage, that’s an extra $3,238 in cost; it’s usually financed as part of the loan. The ongoing monthly fee on that mortgage is about $126 per month — a rate of .085% of the loan annually, paid in monthly installments. The fee is known as the MIP, or mortgage insurance premium. The MIP was targeted by Trump’s order.

In the waning days of the Obama administration, the FHA announced it would drop the fee from 0.85% to 0.60% — a 0.25% drop. That would have provided $37 in monthly savings for a buyer with a median-priced home, or about $446 annually, Attom says. An FHA buyer in Santa Clara County, California, would have saved much more— $1,448 annually.

The fees collected from consumers go into the fund used to support the FHA loan program.

Before the recession, ongoing FHA fees were 0.55%. Not surprisingly, the FHA fund collapsed in the face of massive defaults during the collapse of the housing bubble. To restore the fund, FHA fees were raised steadily, beginning in January 2008, reaching a high of 1.35% in January 2013.

When the fund reached Congressionally-mandated reserve levels, the premiums were reduced, down to 0.85% in January 2015

A drop that would have returned FHA monthly fee levels to their 2008 levels, announced Jan. 9, was set to take effect on Jan. 27.

On the eve of HUD nominee Ben Carson’s confirmation hearings, Financial Services Committee Chairman Jeb Hensarling, R-Texas, was critical of the fee cut.

Greater Risk of Another Bailout?

“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Hensarling said. Carson then said he would “really examine” the premium cut at his hearing.

Daren Blomquist, senior vice president at ATTOM Data Solutions, says the rate cut two years ago triggered a short-term jump in home sales to FHA buyers. On the other hand, the impact of the rate cut wasn’t as dramatic as hoped, in part because fast-rising prices gobbled up much of the anticipated increased buying power.

“This decision not too surprisingly reflects the Trump administration’s fiscally conservative philosophical bent, favoring not putting taxpayers at risk — or at least what they perceive as risk — for the sake of a government program that helps people buy homes,” Blomquist said to me. “This is not to say that the Trump administration won’t take policy steps to help the homeownership rate rebound, but the levers pulled will more likely involve trying to allow the market to address the situation with deregulation rather than addressing the situation through government programs that potentially put taxpayers at risk.”

HUD did not immediately respond to Credit.com’s request for comment as to why the fee cut was suspended.

Buyers might be tempted to wait and see what the Trump administration does with FHA fees — some observers think they could ultimately be lowered — but that might be a mistake. If home prices continue to rise, those increases would quickly eat up any savings from lower FHA fees.

Image: RobertCrum

 

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The Change That Could Help You Score a Bigger Mortgage in 2017

FHA loan limits are going up in 2017.

The Federal Housing Finance Agency recently announced that loan limits for 2017 are going up. In many parts of the country, loan amount sizes are rising. In particular, the conforming loan limit has risen from $417,000 to $424,100. (Conforming loans, which are not to be confused with conventional loans, are mortgage loans that adhere to guidelines set by Freddie Mac and Fannie Mae.)

While these mortgage loans’ rise may not seem significant, they’re particularly important because loans that exceed $424,100 are considered to be conforming high balance loans, which means higher pricing and higher fees, as they’re greater than the conforming loan limit. This change by the Federal Housing Finance Agency also means that the maximum county conforming loan limits will be increased, making it easier to get a bigger mortgage or to buy a house with less than 20% down, for example.

Here’s an illustration: Looking at Sonoma County, the old maximum county loan limit was $554,300. In 2017, that number will change to $595,700. This represents an additional $41,400 that does not need to be brought to the table anymore. That money can be financed instead. Essentially, the loan limit increase allows you to borrow more money and still stay within conforming loan limits. The reason this is important is because when the loan exceeds the maximum county limit, it automatically enters a more restrictive lending landscape. Such requirements for homeowners include lower debt-to-income ratios, a stellar credit history and a more solid financial picture. (Not sure where your finances stand? You can view two of your free credit scores, updated every 14 days, by visiting Credit.com.)

These loan limits allow more people to borrow more money without having to put more money down in their transaction. Homeowners can refinance bigger loan sizes and still stay within the conforming loan limits. The change will also help homeowners who were just a hair over $417,000 stay within conforming limits. And it comes at a critical time when mortgage rates have etched up in recent weeks, with the 30-year fixed rate mortgage now hovering just over 4.0%.

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How Using Your Latest Paycheck for a Down Payment Could Stall Your Mortgage

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Are you saving up a down payment to buy a home? Here’s something you need to know: Your paycheck can work against your down payment-savings plan if you aren’t careful.

Buying a home requires precision planning, good income, good credit, manageable liabilities and a healthy down payment. Having as much as 3.5% of the purchase price can be a big factor for many families looking to get their piece of the American Dream. In some areas, it can be best to put down 20% of the sales price of the home.

Not all the money you save is created equal, however, and here’s why. When you save money from your paycheck (a good idea for personal financial planning in general), that money is not automatically eligible to be put toward purchasing a house. It’s called income from assets, and income from assets in the world of mortgage lending is frowned upon.

For example, let’s say you receive your paycheck and your net earnings is $5,000. That $5,000 must be in your bank account for a period of 60 days in order for that money to be considered what’s known as seasoned. The bank wants to see you had the ability to save the money on your own volition rather than depositing your income for cash to close. If you are currently in contract to buy a home, these funds, if needed, could delay your closing date. If you are not in contract, plan on keeping these funds in your account for 60 days if you intend to use them.

Using income for a down payment may might not seem like a big deal in the grand scheme of things with all the other aspects that go into buying a home. However, it will be looked at closely by the bank’s underwriter. Your cash to close can very easily set off a bank’s radar if you’re using every last hour you can to get your foot in the door.

If cash is your obstacle to buying a home, you have options. It may mean waiting to put an offer on that house until you have enough money in your bank account or writing a longer contract. Remember, every seller has different motivations and timelines for selling. You will need to plan with your lender to have the funds ready to go, then write the contract to make your home-buying plan a reality.

Also keep in mind that mortgage lenders like to see good credit among applicants, so it pays to know where you stand before you apply. Good credit can also open the door to better rates and more affordable monthly payments. You can view two of your free credit scores, updated every 14 days, on Credit.com.

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The Ultimate Money Checklist to Complete Before Buying a Home

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Image: Xavier Arnau

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Want to Buy a Home in the Next 5 Years? 5 Things You Should Do Now

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Buying a home is a lot like running a marathon. Very few people can just decide to up and do it in the next day or two. It takes preparation, patience and perseverance.

If you’re looking to buy your first home in the next 5 years or so, you’ll likely need to start now to ensure you’re in the proper financial shape to do so. To complete the marathon metaphor, here are six things you’ll need to do to help get you to the homebuyer finish line.

1. Improve Your Credit Score

A lot of first-time homebuyers are holding off on buying in hopes they can get a better rate once they improve their credit scores, according to a recent Experian survey, and that’s smart. While you don’t need top-tier credit to get a mortgage, an improved credit score can not only help you get approved quickly for a mortgage loan, it can also make better interest rates available to you.

Most conventional lenders look for a credit score of at least 640, but a credit score of 620 is often a common credit score benchmark for government-backed loans (like the Federal Housing Administration, U.S. Department of Veterans Affairs and the U.S. Department of Agriculture).

If your score is subpar, and even if it isn’t (everyone’s credit can be improved), you can start improving your credit scores by using Credit.com’s free credit report card, which offers you two free credit scores, updated monthly, plus your very own credit report card that tells you how you’re doing in the five key areas that are included on your credit report and determine your credit score — payment history, debt usage, credit age, account mix and inquiries.

It’s also a good idea to pull your credit reports, which you can do for free every year at AnnualCreditReport.com. Be sure to review it closely for any errors or discrepancies and then dispute any items that are inaccurate.

2. Find Out What Can You Afford

Getting pre-approved for a loan can help you determine how much mortgage you can qualify for, but that doesn’t necessarily mean that’s what you can afford. That’s because lenders look at your credit, income, debts and assets, but don’t take into account your own personal spending and savings habits (you can use this calculator to help you determine just how much you can afford).

When it comes your income, lenders prefer that you’ve worked in the same or similar field for at least 2 years. If that’s not your case, it’s a good idea to explain your situation in writing, and be sure to include any employment gaps. Lenders also have to show that your income supports your mortgage and any other debt payments. If those debts exceed 45% of your income, you might not qualify for as much house as you might like.

Once you know how much you can comfortably afford and what kind of mortgage you can qualify for, you’ll have a better idea of how much you’ll need for a down payment.

3. Save Your Down Payment & Closing Costs

The bottom line with a down payment is the more you can put down, the less you’ll have to borrow, so your minimum monthly payments will be lower. Also if you have only a very small downpayment (5% or less, for example), you’ll qualify for fewer types of mortgages and could also be charged a higher interest rate.

While most lenders would like to see a 20% down payment, some mortgages are available for as little as 3% down. And then there are the closing costs, the fees paid at the closing of a real estate transaction, when the title to the property is transferred to the buyer. They typically range between 2-5% of the purchase price.

Whether you’re able to save for your down payment and closing costs can be a good indicator of whether you’re ready to own a home. If you can’t save enough for a 3-5% down payment, are you really ready for the financial responsibilities of owning a home? Will you be prepared when the furnace breaks or when the dishwasher needs to be replaced? There are a lot of expenses, big and small, that come with owning a home, not just the down payment, mortgage and closing costs.

4. Have an Emergency Fund 

You’ll want to be prepared for unexpected emergencies in your new home, and that means having enough savings to cover some of the big expenses. Sure there are home warranties and homeowners insurance to cover some things, but say, for example, a huge rain storm causes your new home to flood and you don’t have flood insurance. You’re going to be stuck with the costs of cleaning up the damage, remediating any mold or mildew issues, replacing sheetrock, mouldings and flooring — not an inexpensive experience.

Having a savings account with at least several months income in it can ensure you have peace of mind and a solid cushion should things go wrong.

5. Find a Great Realtor

You’re more than likely going to be spending a lot of time with your Realtor when you’re looking for your new home, so it’s important that you like the person. More importantly, having a knowledgeable Realtor who understands your market, knows the neighborhoods, has great connections with inspectors and contractors and has seen his or her share of shady real estate dealings is going to be immensely helpful in your search.

Go ahead and meet with several Realtors that friends and relatives might recommend. Choose someone you feel is a good fit and who you think you can trust and build a relationship with. And go ahead and look at homes now so you can get to know the market a bit better, even though it may seem like the house of your dreams is going to get away if you don’t go buy right here and right now. Your Realtor can make a big difference in finding the right home and having a smooth closing.

Image: Justin Horrocks

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Young Adults Are Skipping Starter Homes, Survey Says

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Young would-be home buyers are still sitting on the sidelines of America’s housing market, with first-time homebuyers representing a decades-low share. Student loans, high prices and low credit scores have all been blamed for this, but Bank of America recently proposed a different explanation.

Perhaps they’re just being patient.

Young adults don’t want starter homes, the bank said when explaining the results of a recent survey; they want to wait until they can buy their dream home and perhaps the home they’ll grow old in.

“Seventy-five percent of first-time buyers would prefer to bypass the starter home and purchase a place that will meet their future needs, even if that means waiting to save more,” the bank says. “Thirty-five percent want to retire there.”

When asked why they haven’t bought a home, 56% told researchers, “I don’t think I can afford a home or the type of home I’d want.”

California loan agent and housing expert Logan Mohtashami said he’s seen evidence of this in his own sales. Younger folks are looking for larger homes, he said, specifically “more three-bedroom detached homes. That means no condos for them.”

But while patience is a virtue, so is facing reality. There’s a chicken-and-egg problem with claiming that would-be buyers are simply waiting and saving: There are very few starter homes for them to buy. Would these young people feel differently if they actually had options?

To understand the question, let’s back up a bit and get into the numbers.

The housing market is hot — home price listings are up 9% nationally from one year ago, according to Realtor.com. But the market is still broken. Only 30% of homes are being sold to first-time buyers, when the historic rate is 40%, according to the National Association of Realtors (NAR). The absence of (mostly) young first-time buyers creates problems all the way up the housing market food chain, making life difficult for families looking to sell and trade up while turning millennials into a generation of apartment dwellers.

Or perhaps it’s not really a problem. It’s possible some homeownership attitudes are changing, and trading up is becoming a thing of the past. Older generations were very comfortable buying smaller homes and moving as their families grew. Today’s buyers are used to much larger homes — the average home built in 2016 is 2,500 square feet, compared to 1,500 square feet in the 1970s, Mohtashami said.

Meanwhile, long-term trends suggest that Americans — both first-time buyers and trade-up buyers — are staying in their homes longer. A study by the National Association of Home Builders shows families moved after 11 years in 1987, on average, but stayed 16 years in 2011. The research is skewed by the housing recession, but the long-term trend is still for buyers to stay in their homes longer.

Maybe we should call millennials the “one and done” crowd.

But back to the chicken-and-egg problem. First-time home buyers have an average student loan debt of $25,000, according to NAR, which puts a serious damper on home-buying dreams. NAR thinks that debt delays saving for a down payment by an average of three years.

But debt is only one of the obstacles young people face.

“There are several reasons why there should be more first–time buyers reaching the market, including persistently low mortgage rates, healthy job prospects for those college-educated and the fact that renting is becoming more unaffordable in many areas,” said Lawrence Yun, NAR chief economist at NAR. “Unfortunately, there are just as many high hurdles slowing first-time buyers down. Increasing rents and home prices are impeding their ability to save for a down payment, there’s scarce inventory for new and existing homes in their price range, and it’s still too difficult for some to get a mortgage.”

Where Are All the Starter Homes?

The disappearing starter home is one element of the equation that some have overlooked, but it’s critical. Five minutes on any realty website can offer a tough dose of reality to anyone dreaming of buying a first home.

Sales of $200,000-and-under homes dropped the past two years, according to RealtyTrac. And many of the existing cheaper homes — often made available through foreclosure during the recession — have been snapped up by investors and turned into single-family rental units. A report last year from Harvard’s Joint Center for Housing Studies found that the recession added 3.2 million more single-family home rental units, “unprecedented” growth in this part of the market.

Then there’s the new construction problem. Builders just aren’t building $200,000 homes right now for a simple reason: Larger homes mean larger profit margins. BuilderOnline.com did a great job of breaking down the math in a story last year:

Making a $200,000 home work as a home builder is junior high–level arithmetic. Solving for profit — say, 20% — land and building direct costs cannot exceed $160,000. Problem is, a 20% margin on a sub-$200,000 house has become frighteningly elusive in the past decade.

The lowest build cost is around a $50 a foot,” says David Goldberg, a home building and building products manufacturers analyst for UBS, New York. “If you do a 2,000-square-foot house, which is what you’d have to do to compete with existing stock, that leaves you with $100,000 of sticks-and-bricks cost. The maximum cost on the land would be $60,000.”

So back to the original proposition: Are young people staying in apartments or living with their parents because they are patient or because they are hopeless? The answer, no doubt, lies somewhere in the middle. But when young people say they are simply waiting until they can afford the home they want, you have to wonder if they are being patient or simply sparing themselves the heartache of shopping for a unicorn.

If you’re in the market to buy a home, it’s a good idea to check your credit before you apply, since a good credit score will help you qualify for better terms and rates. You can see where you currently stand by viewing two of your credit scores, updated each month, for free on Credit.com.

And if your credit is looking lackluster, you can try to improve your score by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries.

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Image: Xavier Arnau

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The No-Down-Payment Loan Everyone Wants, But Few Get

buying a home

One mortgage loan program that’s become popular in recent years is the U.S. Department of Agriculture loan. The program allows you to buy a home with no money down and low monthly mortgage insurance. Here’s what you need to know if you’re interested in this type of financing.

What the Program Entails

The USDA offers this mortgage loan program to help less-industrialized areas attract more homeowners. The USDA determines certain areas in each county nationwide that allow borrowers to put no money down and purchase a home with a 30-year fixed-rate mortgage. As an example, Sonoma County, California has a few USDA-eligible areas. But loan applicants must not earn more than $97,000 per year.

Location Is Everything

The USDA will only grant loans to borrowers aiming to buy a single-family house for less than $375,000. So if you want to buy a house in Sonoma County, where median home prices exceed $375,000, you may find a USDA loan does not suit your needs.

Let’s rewind the clock to 2012 using our Sonoma County example. Back then, its median home price was $325,000, and as such, USDA loans were popular. That is, the USDA’s view on affordability was consistent with the local housing market. But in several markets nationwide, the average median home price per area has soared, exceeding $375,000 in many pockets. Simply put, in order to qualify for a house in the $425,000 to $450,000 range, you need to earn $97,000 a year or more, which would render you ineligible for the USDA loan.

This income-to-payment depiction is also based on cumulative debt. If you carry a car loan, student loan or credit card debt, for instance, you would need even more income, which would push you out of the USDA box. The USDA loan has a strong debt-to-income ratio requirement at 31%.

What’s Practical for Your Market 

It’s important to speak with a lender about how much house you can afford. You should also speak with a real estate agent to learn the average price for your area and what kind of homes fit your budget. To purchase a house in Sonoma County, California, for example, you’ll need at least $20,000 to get your foot in the door. And it will probably mean having to look at different types of mortgages, such as Federal Housing Administration loans, which would require a 3.5% down payment but offer a more flexible debt-to-income ratio requirement. Alternatively, a 5% down conventional loan may be more appropriate since, like an FHA loan, there are no limitations on location or household income.

Until the USDA adjusts its requirements, USDA loans generally will remain out of reach for prospective homebuyers. Of course, the biggest obstacle, aside from figuring out which mortgage loan program is best for you, is getting the house in contract. Many sellers consider a USDA loan offer from a client with 100% financing less attractive than a borrower with down payment funds. Knowing this fact alone may help you get an offer accepted than going with a loan that’s inconsistent with the local housing market.

Remember, you won’t get very far with any mortgage application if your credit’s not in good shape. To see where you stand — and how debt may be affecting your creditworthiness — you can view your free credit score, updated monthly, on Credit.com.

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