Last year, the Federal Reserve took action to try to bring down inflation. In response to those efforts, mortgage rates jumped up rapidly from the record lows we saw in 2021, peaking at just over 7% last October. Hopeful buyers experienced a hit to their purchasing power as a result, and some decided to press pause on their plans.
Today, the rate of inflation is starting to drop. And as a result, mortgage rates have dipped below last year’s peak. Sam Khater, Chief Economist at Freddie Mac, shares:
“While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
That’s potentially great news if you’re a buyer aiming to jump back into the housing market. Any drop in mortgage rates helps boost your purchasing power by bringing down your expected monthly mortgage payment. This means the lower mortgage rates experts forecast this year could be just what you need to reignite your homebuying goals.
While this opens up a window of opportunity for you, remember: you shouldn’t expect rates to drop back down to record lows like we saw in 2021. Experts agree that’s not the range buyers should bank on. Greg McBride, Chief Financial Analyst at Bankrate, explains:
“I think we could be surprised at how much mortgage rates pull back this year. But we’re not going back to 3 percent anytime soon, because inflation is not going back to 2 percent anytime soon.”
It’s important to have a realistic vision for what you can expect this year, and that’s where the advice of expert real estate advisors is critical. You may be surprised by the impact even a mild drop in mortgage rates has on your budget. If you’re ready to buy a home now, today’s market presents the opportunity to get a more affordable mortgage rate, find your dream home, and face less competition from other buyers.
The recent pullback in mortgage rates is great news – but if you’re ready to buy now, holding out for 3% is a mistake. Work with a local lender to learn how today’s rates impact your goals, and let’s connect to explore your options in our area.
What good is a pre-approval…and why are agents always trying to make me get one?
If you’ve been in contact with a real estate agent lately (or even spent some time on a real estate website), you’ve probably seen a lot of talk about “getting pre-approved” or “you need a pre-approval.” A pre-approval is vital in today’s market (and in any market in my opinion) to finding the home you want, the home you can afford, and the home you can get under contract without losing it to someone else.
“Pre-approval” is a letter from your lender stating you are pre-approved to buy a home for a certain price. Does it guarantee you’ll get the loan? Not necessarily, but it does improve your chances.
What’s the process?
Pre-approval begins with you speaking to a lender. They will collect information about you, your current living situation (buying or renting), job history, your social security number, and run a credit check to get your FICO score (also known as your credit score). Lenders vary on how they go about the process, but the basics remain the same. Some lenders will do it over the phone while some want to sit down with you and require you to bring certain paperwork (pay stubs, W2s, bank statements, etc.) along with you.
By checking the basics of your employment, financial statements, and credit score, the lender begins to get a picture of who you are as a credit holding member of society. Do you have constant late payments or are you always on time? Have you been employed steadily for a week or 10 years? Do you have any tax liens or judgements against you? Have you ever filed bankruptcy with the help of ch 7 bankruptcy lawyers? Do you have a large bank account showing a pattern of savings or is your account always teetering on being closed for insufficient funds. Is your outgoing debt higher than your income or are you debt free? These are just some of the things lenders are looking for when you seek pre-approval.
Most lenders use various computer programs to get your pre-approval. They plug in the numbers and the software runs it through its algorithms to determine if you’re pre-approved. There are times when the software comes back on the edge of one decision or another and then the lender can step in and get the loan manually pre-approved.
In the end, you’ll wind up with a thumbs up or thumbs down and a dollar amount of the loan the lender feels you’re qualified for. A good lender will also sit down with you at this point and discuss your goals and options in buying a home. You might be approved for a $200,000 loan, but because you’re trying to save some money for the future, they might recommend you only buy up to $150,000 to keep your payments at a level you can afford (and have money left over to put away).
So why do real estate agents care about what I’m pre-approved for?
We as agents do care about the pre-approval – very much so. It is one of the most important steps in our first few meetings with a client. The pre-approval process provides us with several things, some of which are crucial to us doing our jobs and providing you with the best experience.
First, the pre-approval process gets the ball rolling. Many buyers like to take their time perusing listings on the internet, going to open houses, or “just looking.” The pre-approval process is a defining moment in the search process. It gets the buyer into action mode and sets the agent’s sights on the next steps.
Second, it allows us to pinpoint what you can spend as we look for what you’re looking for. You tell us you want a 5 bedroom house in a certain community, but we now know that a 5 bedroom in that community is out of your range – we can help you make firm, educated decisions. You might have to settle for the 4 bedroom in that community, but we know of a nearby neighborhood that has a 5 bedroom that fits your price range. We hate to see a client falling in love with a house that we later find out they can’t afford. I certainly don’t like to be the bearer of bad news.
Third, I don’t know any listing agent (or banks or HUD) that will take an offer without a copy of a pre-approval letter. Without one, there is no sense in submitting an offer, because it will just get turned down. The seller wants to know that when you say “I’d like to buy your house,” you can afford it and they won’t be stuck scrambling to find another buyer when you get turned down for a loan.
And what benefits does it have for me?
Most lenders will lock in your rate for 90 days, allowing you to get pre-approved now and take advantage of today’s rate instead of the rate three months from now. Now of course, interest rates can be volatile and change on a whim. Because of this many lenders offer what is called a “float down.” This allows you to lock in today and move your interest rate to a lower one if it becomes available during the period between locking in your rate and the actual purchase of your home. Typically, a lender will only allow you to do this once, so you must choose wisely.
It gives you a road to recovery if there are any problems. Many people have credit problems. Its not uncommon during the pre-approval process to uncover a debt that has long since been forgotten, mistakes on your credit report, or even someone else’s credit history appearing on your report (my dad and my brother had some cross reported items as they share the same name). By getting approved now, there will be no surprises later. Many people just need some simple adjustments to boost their credit score (allowing them to buy more, at a better rate, or push them over the edge towards being approved).
So I have a pre-approval – that means the “money’s in the bank”, right?
No. Although a pre-approval is about as close to getting a loan as you can get (without being handed a big pile of cash), it is not a guarantee. Your loan is still conditional upon you meeting the requirements of the loan. This is a great time to not apply for new credit, charge anything to your credit card, go buy a new car – anything that will add debt to your credit report is a bad thing right now. Just hold tight and wait to get the keys to your new home before buying all that new furniture or a shiny new red convertible. During the process of buying your new home, the lender will re-check your credit towards the end of the process as well, so you want to look as good to them on paper as you did when you first got your pre-approval.
The lender will probably ask for a lot of paperwork during the loan’s actual approval and getting it to them in a timely fashion will help alleviate any unforeseen problems. Underwriters (a whole other blog post) are notorious for asking for additional information during the approval process and it can seem frustrating, but just remember – they’re taking a risk by giving you a large sum of money, so they have to cover all their bases too.
Pre-Qualification vs. Pre-approval.
Pre-qualification is similar to pre-approval, except it relies on you giving the lender the facts about your income, debt, employment, etc. without any real verification. It seems to be going the way of the dinosaur and is pretty useless these days. It used to be you could make an offer on a house with one, but anymore no one wants them. If given the choice (which is rare), go for pre-approval as it is a much stronger statement of your financial situation.
One final note…
When a lender pre-approves you, have them send a copy to your real estate agent for their files. This will make an offer a quick and easy process and you won’t have to go find the letter when you need it most. Of course, when making an offer, your agent will try to contact the lender and get a pre-approval letter written so that it reflects the offer price. There is no need to show your hand when making an offer and suggest to the seller that you’re offering this much, but could afford and are pre-approved for much more.
photo courtesy of Toolstotal
Everyone knows that when buying a home, your credit score comes into play. What many people don’t know is just how good is good enough to buy a home, how it can impact your chances of buying a home, and what to do if you have bad credit like rv bad credit loans and need some help repairing it. Credit can be mystifying at best, but with some common sense factors and a little knowledge, you can control your credit and keep yourself on the “plus” side so that you can buy a home easier and with more favorable terms.
What is a good credit score?
Credit score requirements change quite often as lenders adjust their rules and regulations to safeguard themselves. Immediately following the recent housing crisis, credit score requirements were raised, making it difficult for many buyers to get a loan, even if they had “decent” credit.
These days, 740 or higher is considered excellent credit. FHA and VA loans want a minimum of 620 and conventional loans, depending on down payment, look for a minimum of 640.
Please note: these credit scores can change at any time and are not considered fixed numbers. Please check with your local lender to see what loan programs they have and what their credit score requirements are.
How does my credit score affect my home buying?
The credit score (FICO) is a mathematical computation of all your credit history represented by a single number. This single number represents your credit worthiness – basically put, whether or not a bank can trust you to repay them their money in a timely fashion. If you have a low credit score, you are considered a higher risk for non-payment (whether it be default or late payment). The higher the risk, the less likely a bank is to lend you the money.
As with anything in life, the more trustworthy the lender feels you are, the more likely they are to lend to you…and the better terms you might receive on that loan. Of course, credit isn’t the only factor lenders take into consideration when making their decisions, but it is a big part. You can have excellent credit, but no cash on hand and be turned down for a loan. Your credit is the first item that helps a lender determine if they should dig further and take a look at your income, debts, and additional factors that will in the end determine your loan and the terms you receive for that loan.
How do I repair my credit?
The number one piece of advice for improving your credit score is to pay your bills and pay them on time – every time. Late payments are one of the worst things to do to yourself if you’re trying to improve or repair your credit score.
There are a few things you can do to repair your credit, the first is to know what’s in your credit report. You can access your credit report, for free, once a year at Annual Credit Report. We suggest you pull one every year in order to keep an eye out for any mistakes or fraudulent activity (identity theft). Take a look and make sure all the information is accurate. See anything that seems fishy? Contact the credit bureau and talk to them about the item. It may be something you forgot about or it might be something that you can dispute.
Sit down with a lender and discuss your plans to purchase a home. Often, if your credit score is borderline, they can offer specific steps to improve your score enough to get you above the minimum threshold for the loan. Occasionally, their advice might surprise you, so be sure you talk to someone who knows the ins and outs of credit first. We’ve seen instances where it was better to pay off a $15 charge than payoff a $5,000 charge, which may seem counter-intuitive when trying to improve your score.
If your credit score is really low, you may want to consider a credit repair company. There are many out there and some have not-so-great reputations. Be very careful and make sure you read all the fine print in order to be sure you know what you’re getting into. If you do go the credit repair route, be sure to remain diligent and follow all instructions, so that the process goes as smoothly as possible.
Special thanks to Luis Sandoval Jr. for asking the questions that led to this post.
image courtesy of The Consumerist
There is no shortage of places to get a home loan from and there are plenty of quality professionals who work hard in the lending world. Picking a lender is an important piece to the real estate puzzle, so how do you choose one? A good lender will help you avoid the issues that can cause delayed closings, sudden changes to terms of the loan, and keep you from laying in bed with a massive headache worrying about how you’re going to buy your home and do any changes with the help of window replacement service. The best lender is the lender you know and trust.
When choosing a lender, there are a few things you should consider. You want someone you feel comfortable around, you want someone who knows the business and the loan products available, but most importantly, you want someone you can meet face to face.
Without that face to face connection, loans can become frustrating to the point of banging your head against a wall. This is why most real estate agents will advise against internet-based lenders. Although some of them may offer slightly better rates, if the loan doesn’t close, you’re still left without a home and that better interest rate means nothing.
Ask your agent who their clients are using and who is getting the job done. Ask your friends and family – but don’t ask your uncle who bought a house once in 1963 that isn’t in the same state as your new home. Local is the the best way to go.
Once you find a lender that rocks – let others know, pass their name on. Just like real estate agents, lenders rely on word of mouth and referrals to build their business. Knowing your lender face to face can make a huge difference in the home buying process, so interview a few and find that perfect match.
image courtesy of PunkJr
Lewis Carroll famously said, “If you don’t know where you are going, any road will get you there!” This is especially true for home buying. Personal due diligence in preparing an organized plan with a sound real estate agent will give you countless advantages as you navigate your way through the process. Why work with a licensed agent?
First and foremost, a real estate agent belongs to a professional society. This benefits you immeasurably. How? Once you have established an agency relationship, real estate experts are obligated to you by means of a fiduciary connection – an ethical association of confidence and trust for life. And through their professional connections, they have limitless resources to help you expeditiously locate the home that suits your needs. And through their professional experience, they can provide opportunities to obtain it at the right value and financing. They are also measured in the art of negotiation and have vast skill with the plethora of situations and their related forms. Most importantly, they will allow you to be ready when the opportunity arises. Too many people miss out on their dream property because they are not ready!
How can you prevent unpreparedness? Well, let’s take a look at some key points that can assist you. A contributing factor to readiness is financial preparation. You will have to understand your fiscal strengths and weaknesses. One way to do that is to obtain a pre-approval letter from a lender for the price range you qualify for. Agents have contacts with many lenders who can help you find the right loan to suit your needs.
What will lenders look at? In general, lenders traditionally look at several key factors. First, they will have to know how much cash you have access to and how readily available it is. Available cash will determine the loan type. They also look at current income and potential for income along with debt and credit history. These factors will help determine your loan to value ratio (LTV). Most lenders will allow 28% – 33% of income to be committed to a mortgage and no more than 36% – 41% combined with mortgage and credit debt.
Are you an existing homeowner? Can you own two homes at one time or do you need to make the deal contingent on selling your current home? If buying is dependent on selling your current home, you will have less leverage when negotiating for market value.
What if you can own two homes, should you buy first or sell first? Usually the best option is to put your home on the market and then start house hunting. The goal is to try and limit the time between the closings on selling your house and buying another. Your agent will be invaluable in assisting you with the options associated with this situation.
As you can see, we have just brushed the surface on several considerations that will assist with your preparations in purchasing a home. They ranged from establishing a fiduciary relationship to financing to selling and buying at the same time. Just remember, hope of getting lucky in finding a good deal is a method, but luck comes around a little more often when a “prepared buyer” works with a “real estate professional.”
image courtesy of Life Will Find A Way