Buy That Home Now… If You Can!
I just finished reading a rather interesting book called “Aftershock: Protect Yourself and Your Profit In The Next Financial Meltdown“. Yes, the title is a mouthful and sounds like “gloom and doom” — to some extent, it is. However, the way in which they deliver their overview of how our current economic circumstances are simply a series of bubbles bursting makes the negativity palatable, respectable and believable given the evidence they purport. In truth, it isn’t so much negative as it is eye-opening material for most readers that are media and politician spoonfed financial inconsistencies that are going to eventually make a mess for the world economy. Go read it. Please. If you still believe that the markets are going to turn around and you’re not doing what you need to secure your finances over the next 6 months to 5 years, you definitely should give this a read.
But that’s not why I’m writing this post.
In line with some of the points in the book discussing the housing situation, I have one quibble with how they perceive the mortgage market. The housing bubble began bursting a while ago now, but there’s still some more to go when it comes to housing prices. There are some markets that have been relatively sheltered in terms of pricing – New York City comes to mind. While the rest of the nation experienced massive pullback and a dramatic drop in housing prices and an increase in mortgage defaults, New York City is one of those few places where vacancies on apartment rentals is under 1% as of May 2012 (article) and residential leasing is remaining relatively steady price-wise with limited affordable leasing opportunities (< $250,000). Mortgage rates are at historic lows and honestly, now is the time to refinance your existing home loan or purchase a new home if you plan on staying for the long haul (at least 10 years). As of today (June 21, 2012), the rates on a 30 year fixed mortgage is 3.66%; the 15 year fixed is 2.95%. So why buy or refi now?
We will NEVER see these rates again. Once inflation grabs a hold of our interest rates, it will be a very long time before we even get into this territory again.
Most people are unable to quality for mortgages at these historic rates though; the requirements are more stringent than ever. (If they were stringent with them back at the turn of the century instead of letting Tom, Dick, Harry and Paul have a loan, we wouldn’t have had the housing debacle we ended up in… but that’s neither here nor there at this point.) Banks sure do have to be more careful about who they issue loans to.
So what do you need in today’s market to get a good rate on a mortgage?
- STELLAR credit scores: For the best rates, you’ll need at least 760. To get a “good” mortgage, don’t even think of talking to a broker or loan officer without at least a 700 FICO score. Clearly this means you need to have a great credit report: no delinquencies, no late payment, low debt-to-credit ratio, adequate credit history utilizing a wide level of responsibility across credit types (revolving credit, student loans, car loans, etc). While it should go without saying, you need to be employed
- Shop around (but not too much): The big banks aren’t always your best bet when it comes to getting a mortgage. Try some local banks or credit unions as more approachable alternative.
- Get a a pre-approval letter: Know how much home you can actually afford when you start the house hunt. The thing that baffled me about the “no-substantiation” loans they gave out a few years back is that they completely circumvented this important part of the process. A person with children making $35,000 a year trying to buy a $350,000 home? Does that sound affordable to you? (<_< suspicious.)
- Increase your down payment to at least 20%: The problem most people run into is coming up with that large lump sum of cash for your down payment. It works to your advantage in the long run and keeps your mortgage payments comparatively lower over the life of the loan. Many lenders now require that any down payments under 20% require the purchase of PMI (private mortgage insurance) in case you ever default on your loan. This step really depends on the type of home you are attempting to purchase: VA loans are 0% down (veterans only), Homepath loans are 3% down, (Fannie Mae owned homes), FHA loans are 3.5% down (but PMI is required) or Conventional Loans at 5%. The bottom line is that the lender wants to cover its butt, so they want you to pay up for the privilege of obtaining a loan from them.
- AVOID ARMs (Adjustable Rate Mortgages): Don’t do it. They are inflation adjusted and will skyrocket the minute federally regulated interest rates go up. And they’re going to go up sooner than you will like.
Home loans are the largest financial responsibility most people will have in their lives. It will constitute the largest asset they have in their lives as well. For that reason alone, it is not something to enter into lightly. In the same token, if you do have the down payment cash available to you and you have the right stuff in terms of your credit scores & history, it might not be a bad idea to secure something stable. Home prices are going to go up and down over the next few years, so don’t look at your house as some sort of ATM machine or readily accessible equity. It’s HOME. No matter what happens, the real reason you would want to get into your own home is to live there with you and/or your family.
My additional thoughts on preparing yourself for home ownership are:
- Have an emergency fund! You cannot have too money set aside for that rainy day or if you suddenly lose employment. I’ve seen it happen again and again.
- Live frugally. Excess expenditures prevent you from savings money for the #1 point above and for a down payment. If it ain’t broke, don’t fix it.
- Be realistic. If you can’t afford the down payment right now, don’t feel bad. Make it a goal and keep your eye on the real estate climate. Rates are definitely going to shift higher over the next 6 to 12 months, but how much higher is undetermined at this point. That $500,000 home may not be for you with what you currently make. You don’t want to commit to a loan of this magnitude and have no real breathing room in your finances.