By Harold Copher, Jr. | Willow Bend Mortgage
If asked to advise buyers preparing to make the transition from tenant to homeowner, insist they call their lender first. Have them make an appointment to meet face-to-face before they dive deeper into the home search. I suggest they pick a time when their schedule is open ended. They should take that opportunity to learn as much as they can about the process of mortgage financing. The need to get the lender’s input on credit scores, ratios, loan programs, property types, appraisals and escrow accounts. They need to learn how homeowners insurance and property taxes figure into settlement charges and their monthly payment.
Most homebuyers are either targeting a payment or a neighborhood. “I would like our monthly payment to be around “x” dollars per month. How much house can I buy with that payment?” or “We have our eye on this area, and houses sell for around “x” dollars. How much would it take to buy in this neighborhood?” “How much would our monthly payment total be?” and “Can we qualify?”
Regardless of which path they are on, all buyers need to get their finances in order first. Completing a successful purchase transaction in a market where properties priced right are moving quickly requires organization and planning. A well-informed buyer is everybody’s best friend. Getting pre-qualified is typically the stepping stone to identifying the parameters for the search. Being pre-approved for the loan is the goal.
We often use the terms pre-qualified and pre-approved interchangeably, but they shouldn’t be. When I represent a buyer who is pre-qualified, I’m simply saying “they seem like nice people, and based on what they told me they earn and have in the bank, I’m pretty sure we can get loan approval.” Pre-approved means “I have received all the required documentation for the loan program proposed, and all we have to do is identify the property and the price.” Two key components to completing the pre-approval are the amount of the down payment and credit score.
Per a November 2017 Fannie Mae American Housing – Urban Institute Survey, 53 percent of renters participating in the survey cited “lack of funds for down payment” as a reason for not pursuing home ownership. In the same survey, 42 percent were “not at all familiar” with low down payment programs, and another 34 percent described themselves as “not too familiar” with low down payment programs.
Per a 2018 Ellie Mae Survey, 36 percent of the respondents indicated they had “not saved enough for a down payment” and 48 percent believed they needed to put down 20 percent or more to purchase a home. Over 80 percent of the respondents believed they needed a credit score over 700 to qualify for a mortgage loan.
The numbers in both reports are clearly pointing out that we need to do a better job of educating our potential clients about their ability to qualify for a mortgage. There are conventional 3 percent down payment loans for first time home buyers, along with FHA’s minimum 3.5 percent down program. These are viable options for low down payment purchases. In addition, if they qualify for USDA, VA or local grant programs, there are 100 percent financing options available. Be cognizant that there may be household income limits and/or other restrictions to address with some low down payment programs.
Higher credit scores translate into tier based interest rate offerings with conventional loan programs, but the differences in rate relative to score is less pronounced with FHA and VA loans. While your rate would be better on a conforming 3 percent down loan with a 700+ FICO score, the minimum FICO score requirement is 620, not 700. I have seen FHA and VA loans approved with FICO scores less than 620.
Start the process early. There are instances when a slight restructuring of account balances can impact a FICO credit score calculation. It may not be a big deal if that improvement is from 701 to 704, but if it means improving a 698 to a 701, that changes the interest rate tier.
Some people just prefer to rent and that is fine, but not having a large down payment or stellar credit shouldn’t keep a renter from exploring homeownership. The first call they should make is to set up an appointment to see their lender. RL