Podcast: Play in new window | Download
Over the past few years, there have been quite a few changes in the mortgage qualification process for those buying a home – with the aim of protecting consumers from the kind of housing crisis and meltdown we witnessed in 2007 when the mortgage industry collapsed, home prices tanked, foreclosures were rampant… and led to a global recession in 2008.
everyone interested in buying a home should be aware of recent regulatory changes, and also not fall prey to common myths about home buying
So, I think everyone contemplating a housing transaction – as a buyer or seller – should be aware of recent regulatory changes. I also want to address common myths about home buying that were nicely covered in a recent article by Caroline Banton in GoBankingRates.com.
Now, I’m sure most of you remember the madness in the housing sector: rash mortgage lending standards, zero down payments even to people with bad credit, aggressive sales tactics that got people into buying a home they really could not afford – on the false pretext that housing prices will only continue to rise over time, etc. That, of course, led to low ‘credit quality’ mortgages (sub-prime mortgages as they were called) being repackaged by Wall Street and sold off with excellent credit ratings, and everything famously collapsed like a house of cards.
Then, federal regulators initially tightened lending standards to prevent such future defaults and foreclosures. The new standards used stricter assessments to determine whether prospective buyers had the ability to repay their mortgages when buying a home.
Okay – with that background, let me walk you through the changes and bust some widely held perceptions about home buying.
Myth No. 1: A Big Down Payment Is Required
In January 2014, regulators eased up on those tight lending standards after real estate groups and consumer advocates claimed that millions of Americans would not be able to qualify for housing loans. They argued that people with good steady jobs had simply seen their savings disappear through the 2008 crisis, and good quality buyers just could not afford to make a 20% down payment, as the tighter regulations required.
As a result, the proposed 20 percent down payment rule was dropped. Banks now are only required to document that a borrower has the means necessary to afford a mortgage as long as it does not exceed a certain threshold of debt.
Now, banks typically require between 5 percent and 20 percent of a home’s purchase price as down payment – so there’s more flexibility and people with good credit can get away with putting down as little as 5% though lenders typically require private mortgage insurance (or PMI) for down payments under 20 percent – to protect the lender should you default on the mortgage.
PMI typically costs between .05 percent and 1 percent of the loan amount annually. So PMI of 1 percent on a $100,000 mortgage, for example, would cost $1,000 a year or about $83 a month.
So, believe it or not, most prospective home buyers are still under the false impression that a 20 percent down payment is required – it’s probably the most common misconception lenders encounter.
Additionally, loans from the Federal Housing Administration require a down payment of just 3.5 percent of the home’s purchase price. And loans from the Department of Veterans Affairs and the U.S. Department of Agriculture require no down payment for eligible buyers – so make sure you see how low you can go.
National, state and county programs also offer grants to home buyers – ain’t that nice – provided you meet specific guidelines such as completing a home buying class before obtaining the grant – not too painful, considering what you get in return – I’ll take it if I can!
Myth No. 2: I Need Perfect Credit
Your FICO credit score, which is a measure of your credit worthiness, can range from 350 to 850. And you can qualify for a conventional mortgage with favorable terms at the 720 level and up. First-time home buyers can secure an FHA loan with a credit score of 620 or above.
And buying a home with bad credit is not impossible. For example, veterans can qualify for government loan programs with a FICO score as low as 580 – so see if you qualify for these exceptions.
But, generally, buyers get better financing terms and lower mortgage interest rates if they have higher credit scores, while buyers with lower credit scores pay higher interest rates for mortgages.
Myth No. 3: Fixed-Rate Loans Are Best
This myth is based on the belief that mortgage payments on an adjustable rate mortgage can skyrocket if interest rates climb. Now while that is true, it’s more important to consider the length of time that you intend to stay in the house. So a 30-year fixed-rate mortgage works well for those who intend to remain in the home for about that long.
But remember, the longer the fixed rate, the higher the interest rate.
So if you’re planning on staying in the home for anywhere from four to seven years, consider a shorter-term fixed rate or even an adjustable rate mortgage – because you’ll very likely get a lower rate than the 30-year fixed-rate loan.
Myth No. 4: Location Is Most Important
A quiet neighborhood of homes with white picket fences might be one vision of the American Dream, but savvy buyers look for “hidden gems”, with some of the best deals found in areas that haven’t yet reached their full potential. So look at the community you are buying in. Is construction planned? Are there new housing units being built? Try to glimpse into the future to gauge what the area might look like in five to 10 years.
Myth No. 5: The Home Buying Process Will Be Quick
Once you find the house you want, the next step is to apply for a home loan. A typical mortgage loan generally takes about four to six weeks to close from the time the application was submitted. With an FHA loan, the process could take longer. You also have to allow time for the appraisal and inspection.
So make sure you factor all that in, and have realistic expectations about the amount of time the process can take.
Another common misunderstanding involves the additional costs in buying a house such as closing costs, pre-paid interest, taxes and insurance – which can add up to as much as 2 percent to 4 percent over the down payment. And unless the seller agrees to pay all or a portion of these costs, the burden falls on the home buyer. So talk to your agent about likely additional costs.
Myth No. 6: A Clean Home Inspection Means No Repairs
A common assumption is that a good home inspection means that a home will require minimal maintenance and repairs. However, a home inspection report is really a snapshot of the condition of the home, the building materials and the various electrical, plumbing and heating and air conditioning systems – but once you live in a fully functioning house, you may want to undertake routine maintenance and minor repairs such as changing air filters, getting the vent ducts cleaned, cleaning out the gutters or replacing older windows, doors and roof tiles to more energy efficient options to keep your energy bills down and keep the home healthy and safe.
And Myth No. 7: Properties Are Always Listed on the MLS
Most real estate brokers use the Multiple Listing Service to gather and disseminate information about properties. But there are other ways that homes can be marketed. A company called PocketList ups the intrigue on a property through what’s called a “pocket listing” that is only accessible to preferred buyers. The company also has a mobile app to connect agents and qualified buyers to pre-MLS and private home listings.
Lastly, buying a home that you’d be happy in requires patience and research. So potential buyers and sellers should review the going rate on property sales prices, and research lending options and grants, and do their due diligence on real estate agents and only choose from those that come highly recommended. An agent who is well-informed about local markets can steer you in the right direction, save you a ton money and make the whole process a lot smoother.