Despite interest rates beginning to rise, now is still an advantageous time for prospective homebuyers to enter the real estate market.
Although many banks have revised and tightened their lending criteria, that doesn’t mean you can’t get a loan. The U.S. housing market has seen a solid recovery in the last 12 months, with average selling prices rising almost 10 percent year over year, according to the latest Case-Shiller index. Job creation is remaining consistent, consumer confidence is on the rise and housing formations are increasing every month. In addition, the government is continuing to buy mortgage-backed securities that have been keeping rates level across the market. With these relatively low prices, favorable mortgage payments, lower interest rates and low inventories of homes for sale, the market is primed for resurgence.
Of course, the environment is much different today than it was during the real estate market boom. At the peak of the market, housing prices soared. In the current environment, the combination of consumer confidence building, lower housing prices and low interest rates have given prospective buyers increased borrowing power, creating an environment whereby quick decision making has become a necessity. In this competitive environment, consumers are wise to spend some time thoroughly evaluating their financial footing to secure the best loan for their particular situation. Inventory levels are low across the West Coast as well as across the United States, thereby shifting the marketplace into a seller’s market. Buyers who secure their finances and pre-qualify for a home loan are ready to move quickly for homes that are now sometimes only on the market for days, no longer months or years. Here are the steps to take to make things happen.
Understand your entire financial portfolio. Take stock of your complete financial situation to determine what you can afford. You’ll want an accurate picture of your income and expenses as well as any savings you may want to tap for a down payment or closing costs. In general, home payments shouldn’t be more than a third of your monthly income, and it’s important to factor in other savings needs such as retirement, college and emergency funds. It’s also important to know the value of all your assets such as retirement funds, IRAs and the cash value of life insurance policies.
Know your credit score. Banks and lenders are more careful than ever about whom they’ll lend money to, and your credit score is critical. It not only determines the loan options available to you, it also influences the interest rate. For example, a buyer with a 720 credit score purchasing a $250,000 home with a 5 percent down payment might get a mortgage with an interest rate that’s 0.125 percent lower than the rate available to someone with a score of 719. What does that mean? The additional point on the credit score saves the homebuyer $17 each month and $6,000 in total interest over the 30-year term.
Establish a banking relationship. Establish a relationship with a home lending officer at a trusted bank. A home lending officer can explain the key elements of the loan options available and provide resources to assist you at different points in the process, from getting help with a down payment through local support or government programs to selecting a home insurance policy. A great home lending officer will help you evaluate your financial portfolio and provide you the necessary tools and perspective to support you through this complex process and beyond.
Be prepared with a solid down payment. Consider how much you can offer as a down payment. This sum will affect your loan amount and borrowing rate. Whether you’re a first-time home buyer or purchasing a subsequent home, a home lending officer can run scenarios with various down payment amounts to determine which terms and rates best meet your long-term goals. As a potential buyer, if there’s concern about securing down payment funds, ask your lender about assistance programs and loan programs that allow gifts and grants to be used toward them.
Consider the entire monthly payment. Taking out a mortgage involves more than repaying principal and interest. As a homeowner, you’ll need to carry homeowners’ insurance and pay property taxes. In addition to your loan payments, your mortgage statement may include an escrow balance, which will be used to pay insurance premiums and property taxes when the payments come due. Your bank will estimate your annual payments and spread them out over 12 months, letting you build your escrow balance gradually. When determining how much you can afford, be sure to factor in these additional costs, which could increase your monthly payments by several hundred dollars. Additional monthly expenses could include condominium or homeowner’s association fees (HOAs) and/or flood insurance.
Buying a home is exciting, but it can turn into a challenge without appropriate planning. By considering these five simple tips and working with your home lending officer, you can lay the foundation for a successful purchasing process from start to finish. The current combination of low housing prices and low mortgage rates makes this a particularly attractive time to enter the market. With the housing market heating up, now is the time to get your finances in order so you’re ready to make an offer when the right home comes along.
Susan Brown is senior vice president and regional manager, and Gary Duffy is senior vice president and production manager, both for Umpqua Bank’s Home Lending Division. You can reach them at garyduffy@umpquabank.com and susanbrown@umpquabank.com, respectively.
