Dollars & Sense

The Time to Buy is Now–Are you Ready?

by Tolbert Rowe

Last month we talked about the current real estate market and the confluence of factors making for a perfect opportunity for young buyers to purchase their first home. The Millennial Market is defined as one where monthly rent for homes or apartments is comparable to what a mortgage payment would be on a single family home. In some cases rents are actually higher than what proposed mortgage payments would be. Favorable interest rates and still reasonable prices aligned with mortgage programs that require little, if any, down payment make buying a home more of a possibility than many could imagine, especially for Millennials.

If you have been a reader of this column for a while, you know that I believe very strongly that a community of homeowners is more stable, safe, and secure than one where investors own the housing stock. Generally speaking, home owners display more pride of ownership than renters.

You should also know that I do not think that just because someone doesn’t have a 20% down payment they are somehow less worthy of homeownership, and more likely to fill our communities with vacant homes awaiting the auctioneer’s call at a foreclosure sale. It is true; data has proven that those who have less “skin in the game” are more susceptible to walk away from their mortgage obligation than those that do risk losing a monetary investment.

But I also believe, for those who feel secure in their jobs, and have demonstrated an ability to afford a mortgage payment, now is a perfect time to buy. Paying rent that is comparable to what a proposed mortgage payment will be, or accumulating savings, are good indicators that someone is ready to be a responsible homeowner. For those with very little or no monthly housing expense and no accumulated savings, the leap to homeownership may be more of a stretch and a burden.

Payment shock, the amount of increase in monthly housing expense by taking on a mortgage, is a major factor considered by underwriters of first time buyer loans. To enjoy the rewards of homeownership you need to show that the transition from tenant to borrower won’t derail your monthly cash flow.

How should you take that first step in the journey toward homeownership? And by taking that first step, what can you do to improve your chances of being successful in finding the home of your dreams and actually being able to pay for it.

As a first time homebuyer, you need to realize that the home of your dreams is not going to be the first home you buy, nor will this home be the last home you own. National data says the average homeowner will own four houses in their lifetime. Personally I think in our area it is more like three. Your first home is, and will be, exactly that, your first home.

Focus your efforts on finding a home that is convenient to where you work and will not cost an arm and a leg for upkeep and maintenance. Many times lower priced homes require more maintenance and higher utilities because they are older. They could need significant improvement within the next three to five years that will not necessarily add value to your home, like a new roof. All houses have roofs; just because you spent $15,000 on a new roof does not mean you added $15,000 in value. You have enhanced your home’s marketability but not necessarily its value with a new roof.

Your first home needs to be affordable and only you know what is “affordable”. A good baseline to use is what you have been paying in rent or what you have been able to pay in rent by putting money away in savings. Your mortgage payment is permanent. You can’t opt to only make payments when you want to. The lender expects, actually requires, that you make your payment the first of the month, every month.

Once you have made the emotional decision to embark on the homeownership journey you need to know from where you are coming from. Not where you are coming from physically, where you are coming from “Qualificationally”. I know this is not a word but it kind of works for me.

The first thing you need to do is find out what your mortgage credit score is. Have a lender run your credit and if your scores are high enough, go to step two, which is determining what kind of mortgage payment you are qualified for based on your income and debts. If for some reason your scores are not high enough, or you have no credit at all, your homeownership journey will take a little longer.

Before you ask a loan officer to run your credit, make them aware of anything unique about your credit. Not telling them about your bankruptcy six months ago, or a car repossessed three months ago, hoping they will not show up on your credit report is not a good strategy. Make it clear to the loan officer that you know you have some “dingers” on your credit but you want someone to help guide you in what you need to do to become “bankable”, or qualified. If they are not willing and don’t make you feel comfortable, then don’t have them run your credit. Work with someone who will take the time to give you advice on what you need to do to improve your credit.

If your issue is that you do not have credit you need to get some. Cosigners with good credit do not help since all borrowers must have credit scores from all three repositories for most first time homebuyer programs. It is great to have a family member willing to help. The best way is for them to encourage you to get your own credit card as soon as you have a means to pay it back.

Very few creditors, if any, will issue a credit card to someone with no credit history, making it a real challenge to get that first credit card. The quickest, easiest way to acquire a credit card is to get a “secured” credit card. This is a major credit card like Visa or MasterCard issued to you with a limit based upon how much you deposit with the issuer. You send them $300 and they give you a credit card with a $300 limit. If you don’t pay, they keep your money.
If used correctly with all payments made on time you will generate a credit score in four to six months of use of a secured credit card. But, in order to get a credit score high enough to qualify, you need to avoid the two most common mistakes. First is not making a payment on time. It is not a good reflection on your willingness to make a timely mortgage payment by being late on a credit card payment.

The second, and probably most prevalent mistake, is maxing out your credit card or inadvertently going over your limit. Allowing the balance on your card to exceed half of your maximum credit runs the risk that your credit score drops below the acceptable loan program threshold. (This is called the “utilization rate” and is true for everyone). It can be devastating to someone who is trying to establish a credit score to discover that after six months of having a credit card their score is 570. It can take four to six months for your credit score to recover and go up to acceptable levels.

If you are managing one card correctly and you want to have a credit score show up in less than four to six months, you should apply for another card and use it. Many store credit cards will be issued with only a two or three month history of having a credit card. We can discuss this possibility after you have made at least two payments on the secured card.

Next month, we will continue this journey toward homeownership and discuss how much of a mortgage payment you qualify for and which first time buyer program works best for you. In the meantime, if anyone has an idea of a topic or issue they would like to see addressed, please email me at tolbert@baycapitalmortgage.com.

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