Nerdwallet.com, a website that compares financial tools, commissioned a study on homebuyers to better understand where issues emerge. Their findings are based on a survey of more than 2,200 people, about 1,300 of whom have applied for a mortgage and more than 1,400 of whom are current homeowners.Listed below are a few of the major issues that these homebuyers came across, along with solutions to help you avoid making the same mistakes.
While Obtaining a Mortgage:
“6% of mortgage applicants reported that they had been denied a mortgage. Of those who have been denied, more than half (52%) said they had a high debt-to-income ratio, 39% said they had issues with credit history or score, and 25% said they had insufficient income.”
Let’s break this down into three categories:
High debt-to-income ratio
It’s wise to pay off as many debts as you can before applying for a mortgage. Small sacrifices like reducing your “entertainment” budget, waiting to take that extravagant vacation, or making DIY (do-it-yourself) gifts for Christmas can go a long way in helping you to save some extra cash, which you can use to pay off your debts.
We know that our younger, first-time homebuyer clients are finding that large student loans result in high debt-to-income ratios. Some tips for you include:
- Trim your budget. You only have to do this short term, and by canceling a few of your subscriptions, reducing the amount of money you spend on eating out and alcohol, and buying a couple less lattes, you’ll find that each month you have a little more to put towards your loan(s).
- Which brings us to our next point, pay more than your monthly minimum payment. This will help you pay off your loan faster. Even if you can only pay $20 extra each month, start there, and then work your way towards paying more.
- Consolidate and Refinance. If you can refinance for a lower rate, you may save thousands of dollars in interest over time. Those savings can then go toward extra payments, helping you to get out of debt even faster.
- Find more tips here.
Issues with credit history or score
If you don’t have credit history, you can easily start building your credit by applying for a low-cost credit card and using it regularly for small purchases. If your credit score is low, you can:
- Pay down your credit card balances and keep them low.
- Gather up all those credit cards on which you have small balances and pay them off. Then select one or two go-to cards that you can use for everything.
- Be sure to pay your credit card bills on time.See more tips here.
Insufficient Income
While this problem may seem harder to address in the short-term, this articlepoints out that there ares ways to increase one’s income on a loan application such as:
- using income that you may not have considered like capital gains income, Social Security income, VA benefits income, and others.
- bringing in a co-borrower.
A qualified, professional mortgage broker can help you better understand your loan options, the strengths and weaknesses in your loan application, and what you can do today to improve your mortgage prospects. While it can be tempting to shop for mortgages online, be sure that you educate yourself and speak to a professional and experienced lender before applying for a mortgage.
The Homebuying Process:
“Asked what surprised them most about the home-buying process, 19% of millennial homeowners said they were surprised by how long the entire process took, 16% were surprised by how complex it was, and 15% were surprised by hidden fees. These types of surprises can also lead to buyer’s remorse.”
Reviewing the length of time it takes to buy a property, we’ll start from the day you start looking at homes, to the day you are able to walk into the house and call it your own. Understand that each situation is different, and there is no exact formula that will tell you how long this process will take. However, there are some factors that will increase or decrease the amount of time you should expect to spend buying your house.
Most people spend 30-60 days looking for a home. Once you find “the one” and submit an offer, you will usually hear back from the seller within a week as to whether or not your offer has been accepted. However, there is a big IF to this last point. If you make an offer on an REO property (a property owned by a lender), you may have to wait several weeks.
The offer you have written will include a date for close of escrow, which is the day that the title to a property is recorded and officially becomes yours. Therefore, once you get an accepted offer, you will have a reasonable estimate of how much time you will have to wait before you can start moving in. We say estimate because deals can, and often do, get delayed. Whether it’s due to inspections or hiccups when obtaining the loan, numerous unknowns can emerge that will delay the close of escrow. That being said, barring any MAJOR issues such as issues of title, major property defects, or some other disaster, you can expect to close within 30-45 days of the offer being accepted.
Note, if you are paying all cash, this process can take substantially less time. When you take a mortgage out on a property, the home you are buying is the bank’s collateral. This means the lending institution will require an appraisal to determine the property’s worth and a thorough background check of your finances, which takes additional time.
In conclusion, assuming you have a loan, look for your house for 60 days, have a contract that stipulates close escrow in 30 days, and NO major issues arise during the deal, you’re looking at a three month process, give or take a month.
As for the complexity of the home buying process, we won’t go into details on this. I’ll leave you with this thought. Over eighteen people with different roles and jobs touch a real estate transaction, and your real estate broker is responsible for coordinating these people. She is also responsible for ensuring that everything is completed within the appropriate time frame. This is why most people hire real estate brokers: houses, and the process involved in buying them is complicated and takes time.
A little bit of education can easily eliminate the “hidden” in hidden fees. Here are some fees associated with the home buying process that you may not know about:
- Home inspection and Pest Inspection fees: $500-$700
- Closing Costs: According to Zillow, closing costs will run you an extra 2% to 5% of the home purchase price. So if you’re buying a $600,000 home, expect to spend between $12,000 and $30,000. These costs will cover lender fees, the appraisal, title or attorney fees, escrow fees, and interest that has been prorated. Note that some of these can be paid by the seller if stipulated in the contract.
- Ongoing Tax and Insurance: when you use mortgage calculators, you will be given your monthly mortgage payment, but that does not always include taxes and insurance. To accurately assess how much you’ll be paying each month, you need to calculate your monthly principal mortgage, interest, tax, and insurance (PITI) payments. Here is an example of a PITI mortgage calculator that. If you need help with this calculator, give us a call.
- Once you purchase the home, know that additional costs for repair and maintenance will emerge over time. The actual amount you’ll need will vary widely and depends on a number of factors. Most estimates range anywhere from 1% to 5% of the purchase price of the home. If you’re uncomfortable using such a large range to determine your needed savings, you’ll find a more accurate method of determining your home’s repair and maintenance costs here.
A few more interesting finds from the study:
“If they had to do it all over again, 57% of millennial homeowners would change their approach to the home-buying process. At the top of the list: 28% said they’d save more money before buying, 15% would do more research on the home-buying process, 14% would better organize their paperwork from the start, and 12% would do more research on the mortgage-lending process.”
“Among current homeowners, 20% of Gen-X homeowners, like millennials (19%), wished they purchased a bigger home. For starters, more than one-quarter (27%) said they would save more money before buying a home, 19% said they would do more research on the mortgage process, 18% said they would have shopped around more for a home loan, and 16% would do more research on the home-buying process.”
Whether it’s improving your loan prospects, saving more money before buying, or researching the home-buying process before you start, taking time to prepare for this major purchase will go a long way. If you are thinking of buying, we highly recommend that you call Christine, the Broker at Schneider Estates. Christine can answer your questions and help you understand what you can do today to create a successful and prosperous real estate deal.