Sharply higher mortgage rates have caused a sudden pullback in home sales, and now sellers…
Homeownership has its perks, among them tax advantages (the mortgage interest deduction and capital gains exclusion), as well as equity-building opportunities. With the homeownership rate at 64 percent, clearly Americans value having a stake in where they live.
But home prices are going up each year, often outpacing wage gains, making it increasingly difficult for people to accumulate a down payment for a home. That keeps them renters rather than homeowners.
“The rent cycle has been a very difficult thing to break out of in the last 10 years because of the appreciating home market,” says Joseph Polakovic, president at Castle West Financial in San Diego. “As renters save their money for a down payment, the price of the home they were saving for is simultaneously going up in value and requiring more money for a down payment and banking reserves (usually six to 12 months of mortgage payments).”
So how do renters, who are facing rising home prices and high student loan debt as well as other living expenses, make the leap to owning? The answer is as varied as the circumstances of each would-be homebuyer. For many people, the down payment is the main barrier to homeownership, while others struggle with credit issues and some face a lack of affordable housing in their area.
Here’s some expert advice on what hopeful homebuyers can do to escape the rent cycle.
Speak with a pro
If you’re a first-timer, navigating the home buying process can be intimidating. Buying a home is a huge undertaking that comes with big price tags and often long-term ramifications.
If you’ve never bought a house, then you don’t know what you don’t know. It’s a good idea to begin your journey with an expert who can work with you to put a plan in place that aligns with your finances and goals.
“An accountant, mortgage broker or other financial professional can help with budgeting potential costs and what you can realistically expect from your income and available funds,” says Leslie Tayne, founder and attorney at New York-based Tayne Law Group. “You’d be surprised how people make mistakes that can negatively impact the buying process, such as taking money from family without written designations or buying more things on credit or even deferring student loans.”
Whip your credit into shape
Like your SAT score or batting average, your credit score is a number you’re either proud of something you won’t be bragging about at Thanksgiving dinner. If it’s the latter, you might be stressing way too much.
Unlike natural intelligence or raw hitting talent, you have total control over your credit score (absent any fraud or identity theft). And this is an important piece of the homebuying puzzle because it’s the key to getting the best interest rate.
“I help a lot of homeowners get out of this very cycle. My first piece of advice to potential first-time homeowners is to work on their credit,” says Donovan Reynolds, a real estate agent at Coldwell Banker Residential Brokerage in Atlanta. “They need to have at least a 580 credit score; so paying down credit card debt and keeping a low debt-to-income ratio is crucial.”
Start saving now
There are a few good reasons for having a sizable house down payment. The big one is to avoid private mortgage insurance, or PMI. This is a fee lenders tack on loans for buyers who put less than 20 percent down, and it can add hundreds to your monthly mortgage payment. You can learn more about it here.
A larger down payment also means a lower loan-to-value ratio, or LTV, which helps offset a lender’s risk, so they are willing to offer you a better interest rate to attract your business. It also shrinks your principal balance faster, which affects how much you pay in interest and how much equity you have in your house.
“The best advice for future homebuyers is to start saving as early as possible. If you consistently set aside a part of your paycheck, you can build a down payment that will be there when you are ready to buy a home,” says Judith Corprew, executive vice president, chief compliance & risk officer at Patriot Bank, N.A.
It’s important to cut back on your expenses, Tayne adds. She recommends downsizing wherever possible, including switching to a smaller cable package or cell phone plan, and squirreling that money away in a down payment savings account.
“Freeing up some funds can allow you to save more for a down payment. This can also include taking on an extra job to increase cash in the bank, so you qualify for loans more easily and with lower costs,” Tayne says.
Read more at bankrate.com