The all-important spring home-buying season is upon us, and there are a few reasons for buyers to be optimistic. Mortgage rates have dropped compared to last fall, inventories are rising and signed contracts jumped 4.6 percent in January, according to the National Association of Realtors.
Yet problems persist, especially when it comes to affordability. The increase in home prices nationally continues to outpace wage gains, making housing unaffordable for many potential buyers. The median price of a home listed in February jumped 7 percent annually to $294,800, according to Realtor.com.
Fortunately, the number of listings rose 6 percent, with an additional 73,000 listings compared with a year ago. The rising inventory of homes means that sellers are starting to respond by cutting prices. In February, 39 of the 50 largest markets saw an increase in share of price cuts, according to Realtor.com. Las Vegas saw the biggest change, a 19 percent jump in the number of sellers slashing their asking prices.
If rates continue to stay low and housing inventory rises in your city, it could be a good time to buy. Still, prospective buyers need to realize the cost to become a homeowner is still steep. In addition to needing money for a down payment, buyers need to be prepared to pay closing costs, inspection fees and other expenses. But if the time is right, here’s what you need to do to qualify for the house you want:
Clean Up Your Credit Score. Mortgage lenders are looking for buyers who will be able to make their monthly payments, which means the higher your credit score, the lower your interest rate. This is especially true for first-time buyers who may qualify for a minimal down payment.
According to Experian, payment history and credit utilization ratios are among the most important in many critical credit scoring models, and together they can represent up to 70 percent of a credit score. To improve your credit score, make sure to pay all of your bills on time, pay off debt or keep balances on credit cards low and clear up any inaccurate information on your credit report. You can get a free credit report by going to www.annualcreditreport.com.
Find a Mortgage Loan with a Low Down Payment. For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the FHA low down-payment advantage, which is currently at around 3.5 percent. If your credit score is below 580, however, you aren’t necessarily excluded from FHA loan eligibility.
Many banks, credit unions and online mortgage lenders offer FHA loans. But FHA loans aren’t the only low-down-payment mortgages around. Fannie Mae- and Freddie Mac-backed mortgages allow down payments as low as 3% for qualified borrowers. These loans, as well as FHA loans, require borrowers to pay for private mortgage insurance.
To find out more about FHA programs in your state, check out this list compiled by the FHA: www.fha.com/fha-downpayment-grants
Work With a HUD-Approved Housing Counselor. Nonprofit organizations such as credit.org and Money Management International have counselors available to speak to any prospective homebuyer on the telephone or online. These organizations are free and also offer pre-purchase housing counseling classes that help buyers understand the full cost of owning a home.
In addition, a counselor will help buyers analyze how much they can afford to spend on a house and how much money is needed for a down payment. They will analyze a person’s income, debt and build a monthly budget to determine if you will qualify for a mortgage loan. Finally, the counselor may have first-hand knowledge of local and state government down payment assistance programs and can help guide you to the right one.
Access Mobile Apps. There are now mobile apps that provide prospective homeowners with valuable information as part of the homebuying process. HLP’s app, HLP.guru, connects consumers with advanced analytics about their credit score, borrowing capacity, and other critical financial information. It simulates how much money a person can borrow for a loan and how higher credit scores can improve their ability to borrow.
Each prospective homeowner using the app also has access to "gurus"—HUD-approved housing counselors—who answer questions, offer advice and help implement a financial action plan. Individuals can access HLP.guru from a mobile phone, tablet or desktop. Learn more at https://hlp.guru.
Mark Cole is Chief Executive Officer of HLP, a nonprofit mortgage technology company based in Baltimore. HLP ’s web portal is a one-stop technology solution to help homeowners nationwide ensure that critical documents from distressed homeowners reach mortgage companies. To find out more about HLP’s services, visit www.hlp.org.