MORTGAGE BLOGBlog posted On August 02, 2024
What are some of the biggest homeownership hurdles holding you back? Well, high interest rates and historically high home prices to start! It’s understandable to ask, “WHY are people buying now, and HOW are people affording homes?” Instead of holding off and continuing to wait for rates to drop, this may be the best time to buy, especially with the help of loan programs like Rate Rebound. According to MarketWatch, buying now is key—once the Fed finally starts cutting interest rates, the lack of home supply will remain, meaning that “high home prices today could soar.” Let’s tackle five strategies that can put you ahead of the game in this low affordability market.
The first strategy is gauging your financial readiness for a mortgage. You’ll want to calculate your debt-to-income (DTI) ratio. Your DTI is expressed through this formula: recurring monthly debt divided by gross monthly income = your debt-income-ratio. Add up your monthly payments, including car loans, student loans, rent, and credit card bills. Take this amount by your gross monthly income (your income before taxes and other deductions are taken out). A DTI below 50% is preferred (the lower, the more likely to qualify). Maintaining a DTI < 50% and a credit score above 620 is key to qualifying for as low a rate as possible,
It’s helpful to remember that buying a home is not necessarily for life. You should focus on buying the best home for right now, not the perfect dream home with the kitchen island, the massive backyard, 3 bedrooms, 3 bathrooms, and the absolute best neighborhood. Even in an ideal buyer’s market, you’d be hard-pressed to find a home that ticks off every box that’s within an affordable price range. Set your expectations lower and go into your home search with realistic eyes. Throw out buying a new construction since these homes are typically priced at the tippy top of the market. Consider fixer-upper homes that could use a little bit of TLC. You might even love the challenge of turning an older house into your dream home over time, especially if you take advantage of renovation loans by tapping into your home equity. Finally, consider lowering your location expectations. If you’re willing to move outside of expensive cities to the suburbs, this adjustment could save you the most money.
Your credit score informs a lender about your financial worthiness, whether you’d be a risky or reliable borrower. A higher credit score increases a lender’s confidence that you will make payments on time and can even potentially qualify you for lower mortgage rates and fees. A credit score above 620 places you in a good position, even though certain loans will accept lower credit scores. Ensuring that you’re making timely bill payments, paying down high balances, and occasionally opening new credit accounts can boost your existing score. Changes won’t happen right away, so patience is key when building a respectable credit rating.
This seems counterintuitive with the last strategy because having a mixture of credit accounts can improve your credit score. However, a big reason why potential homeowners are hitting affordability setbacks is due to their debt payments. The combination of car payments, student loans, credit cards, and personal loans can take a huge hit on someone’s monthly paycheck. Ramsey Solutions suggests implementing a debt snowball: if you start putting as much money as possible towards the smallest debt every month while “making minimum payments on the rest,” this can help cut those big debt payments down and make homeownership a possibility.
You might have all your ducks in a row at this point: debts slowly being paid off, a steadily increasing credit score, your DTI ratio calculated, and your expectations set at a realistic spot. However, no one can predict the unexpected. What if you move into your new home just for a thunderstorm to knock out a tree in your yard, causing extensive damage to your windows and roof? An emergency fund is exactly what you should have in place in case the unexpected happens. It’s advised that you save 3-6-months’ worth of your typical expenses. This should be on top of the amount you’re saving for the down payment.
If you take advantage of these cost-saving strategies and decide to jump on the housing market sooner rather than later, you can potentially save thousands on your home loan. MarketWatch advises that purchasing now “before demand explodes — and refinance the mortgage later — can be a strong opportunity for those who can afford a few years of more expensive payments.” Even if rates drop over the next five years, you can always refinance with our Rate Rebound program to adjust your rate to a lower one with no lenders fees and $1000 toward additional third-party fees**. If you want to be a savvy consumer and cut down on home loan costs in today’s low affordability market, contact us today for more information!
Source: MarketWatch, Ramsey Solutions
*CMG Home Loans is not a credit repair agency. This is for informational purposes only.
**CMG Home Loans will cover all customary lender fees which are processing fee, administrative fee, tax service fee, appraisal fee, and credit report fee. In addition, CMG Home Loans will also credit the borrower up to $1,000 towards additional third-party fees. This offer does not cover discount points. Credit cannot exceed total fees. Rate Rebound is only valid on future conventional conforming, government, and jumbo loans in our retail channel (future Construction Loans, All in One, HELOCs, Bond or HFA loans are excluded). There may be additional restrictions based on investor. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans. Offer may not be used with any other discounts, promotions, or interest-only/buy-down and second-lien products. This offer is subject to changes or cancellation at any time at the sole discretion of CMG Home Loans. Additional restrictions/conditions may apply. This is not a commitment to lend and is contingent on qualification per full underwriting guidelines. Program will be available on loans disclosed on or after 11/1/22. Program is applicable for refinances 6 months after closing up to 5 years from original note date and with a net tangible benefit which includes a rate reduction of 0.5%, going from an ARM to fixed rate, reducing loan term, movement to a more stable product, or a lower principal and interest payment. By refinancing the existing loan, the total finance charges may be higher over the life of the loan.
