Buying a home is usually the biggest purchase people make, and the path to arriving at the right decision is often daunting. This is because even a slight oversight may lead to negative consequences in the future. To make matters even more complicated, prospective homebuyers have to find their way around various home buying myths.

While family and friends offer well-meaning advice, with some even suggesting that buying a house is a waste of money, bear in mind that not all you hear about buying a home might be true. Real estate agents and mortgage providers do what they can when it comes to debunking home buying myths, and most experts from this realm mention having to deal with similar misconceptions.

 

1. Renting is Cheaper Than Buying

Whether it’s cheaper to buy a home than continue living on rent depends on where you live. According to a report released by Realtor.com, buying a home in January 2020 was as affordable as renting, if not more, in 15 of the country’s 50 largest metros. Bear in mind that this only highlights the monthly costs involved in buying a home and living on rent. While the rent you pay is never coming back, your mortgage payments help you build equity in your home.

 

2. You Start the Process by Looking for a Home

One of the top myths about buying a home is that you need to start the process by looking for a suitable property. However, this might not be in your best interest because you may set your mind on a house, only to find out you do not qualify for the required mortgage amount. In this case, you’ll need to begin the house-hunting process again, already having wasted valuable time.

Ideally, you should begin the home buying process by ensuring that your finances and your credit score are in order. Then, you seek preapproval for a mortgage. Once you know how much you qualify for, look for homes accordingly.

 

3. Preapproval Comes with a Guarantee

Unfortunately, getting preapproved for a mortgage does not guarantee that a lender will approve your loan. For example, if your employment status changes after you receive preapproval, a lender might reconsider your application. This is also the case if there’s a change in your income or overall financial situation. While lenders review your creditworthiness before granting preapproval, they do so during the final underwriting as well.

4. A 20% Down Payment is Necessary

When it comes to the most commonly spread home buying myths, this one probably takes the cake. Sure, making a 20% down payment is a good idea. However, you may qualify for different types of mortgages by paying less than 20% upfront. When it comes to how much down payment you need, it boils down to your specific situation and the type of mortgage you’re after.

• Conventional mortgage. You need to pay 5% to 15% as down payment, and you also need to account for private mortgage insurance (PMI).
• S. Department of Veterans Affairs (VA) loan. Eligible applicants don’t need to make any down payment.
• S. Department of Agriculture (USDA) loan. If you qualify, you may choose to make no down payment at all.
• Federal Housing Administration (FHA) loan. These loans come with a minimum down payment requirement of 3.5%.
• Jumbo loans. Down payment for these loans can be as low as 10%.

In addition, first-time homebuyers should ideally check if they qualify for any down payment assistance programs run by state and local government agencies.

 

5. People With Poor Credit Cannot Buy Homes

There is no minimum credit score that will disqualify you from buying a home, although the lower it is, the more difficult it becomes to find a mortgage. If you’re looking for a conventional loan, your credit score should ideally be over 620. However, people with slightly lower scores who have high incomes or are willing to make large down payments might also qualify.

When it comes to FHA loans, people with credit scores of over 580 may qualify if they meet a few other eligibility criteria. This is also usually the case with VA loans. If you wish to get a USDA loan, know that most lenders require scores of 640 or higher.

 

6. People With Student Loans Cannot Get Mortgages

Whether or not people who have student loans may qualify for mortgages depends on their specific situations. For example, if you’ve been making all your payments on time, have a low debt-to-income ratio, and have a good credit score, you might find it easy to qualify for a mortgage. However, the reverse holds true as well.

If you have a student loan, make sure you look at your DTI before applying for a mortgage. You should ideally try to get it to less than 36%, although some lenders consider applicants with DTIs as high as 43%. The lower it gets, the better.

7. The Down Payment is the Only Upfront Cost

Your down payment accounts for a major chunk of the money you need to pay upfront, but you need to account for other costs as well. As a buyer, you are also responsible to cover your loan’s closing costs. Closing costs may vary from 3% to 6% of a home’s selling price, and the state in which you purchase a home also has a bearing on how much you need to pay.

 

8. Your Mortgage is Your Only Expense as a Homeowner

One of the key facts about buying a house is that you need to account for more than just your monthly mortgage payment.  For example, you need to pay property taxes that vary based on where you reside. If you get a conventional mortgage and your down payment is less than 20%, you need to pay extra for private mortgage insurance (PMI).  Buying a house also requires paying homeowners insurance, which, according to Policygenius, averages at $1,899 per year.

As a homeowner, you’re responsible for your home’s ongoing maintenance.  In this case, you may expect to spend around 1% to 2% of the home’s buying price each year. Depending on where you buy a home, you might also need to pay homeowners’ association (HOA) or condominium association fees.

 

9. A 30-Year Fixed-Rate Mortgage is the Best

While 30-year fixed-rate mortgages find several takers, they don’t work equally well for everyone, which is why this is among the top mortgage myths. Bear in mind that you get several alternatives from which to choose. These include adjustable-rate mortgages, balloon mortgages, interest-only mortgages, as well as 10-. 15- and 20-year fixed-rate mortgages.

People who opt for 30-year fixed-rate mortgages do so because of two basic reasons. First, the interest rate remains the same over the course of the loan term, so there’s no variation in monthly payments. In addition, the monthly payments of a 30-year mortgage are noticeably lower than that of a 10- or 20-year mortgage.  However, the interest you end up paying for a 30-year mortgage will be significantly higher than that of a 15-year mortgage.

The mortgage that works best for you depends on your financial situation as well as the duration you plan to stay in the house you purchase. Consequently, it’s ideal that you learn about the effect of interest rates and loan terms on mortgages before making a decision.

 

10. Select the Lender With the Lowest Interest Rate

Interest rates play a key role in deciding which mortgage provider to select, but there are other factors to consider as well. For instance, a lender might offer a low interest rate and make up for the same by charging steep fees. When you’re comparing lenders, you should stick to looking at the annual percentage rate (APR) because it gives you an indication of how much you’ll end up paying as interest and fees combined.

Given that paying off a mortgage is typically a long-drawn affair, it’s important to look at the level of customer service a lender provides. Selecting the right mortgage provider also requires looking at flexibility in terms, which may come in the form of weekly/biweekly/monthly payments, payment pauses, and redraw facilities.

 

11. Interest Rate Are Increasing

This makes it to the list of myths about home ownership because although interest rates increased significantly in 2022, one needs to look at the bigger picture. For instance, 30-year fixed-rate mortgages came with interest rates of around or over 7% during the 1990s, and stood largely above 6% before the Great Recession (2007 to 2009).

In addition, while the average interest rate for a 30-year fixed-rate mortgage peaked at 7.08% in October and November 2022, it dropped to 6.09% in the week ending on February 1, 2023. Most experts predict that this number may vary from 5.5% to 6% for the rest of the year. 

 

12. Buying a Fixer-Upper Saves Money

If you think you might be able to save money by buying a home that is a bad shape and fixing it on your own, you might want to give your decision some serious thought. For starters, you should have some knowledge about construction and making renovations, as well as the required skills and tools.

What attracts homebuyers to fixer-uppers is that they get the opportunity to spend less upfront. However, you need to account for the money you’ll need to spend on repairs and renovations, because the total cost may exceed the cost of a comparable home that’s ready to move in soon after the purchase.

13. There’s No Need for Professional Home Inspections

This is one of those home buying myths that might end up costing you a tidy sum in the long run. Even if you think another prospective buyer might beat you to the finishing line by choosing to skip the home inspection stage, it’s best to err on the side of caution. Remember that checking a home on your home is not the same as getting a professional to carry out the process.

While a professional home inspection comes at a cost, it may help you save money in the long run or even steer clear of making a bad decision. The American Society of Home Inspectors (ASHI) Standard of Practice indicates that a home inspection involves checking a home’s:

• Interior
• Exterior
• Structural system
• Roof system
• Plumbing system
• Electrical system

 

14. You Should Buy a Home During the Spring Season

Sure, the real estate industry is typically buzzing with activity during the spring season, but this does not mean you need to restrict yourself to buying a home during this period. Besides, the truth about buying a house is that you don’t really have to wait for the perfect time to move forward.

While the spring season usually sees more real estate transactions than other periods, high competition may leave little room for negotiation. The fall, on the other hand, usually brings with it a fair amount of inventory along with reduced competition. This means you may land a good deal even if you choose to buy a home in the fall.

 

15. Schools Don’t Play a Role if You Don’t Have Children

Prospective homebuyers who don’t have children might have heard that there’s no need to pay attention to schools. However, there’s more to schools in a neighborhood than just educating children. This is because the presence of good schools is typically an indication of good neighborhoods. Besides, homes in reputable school districts tend to have higher values, and they usually manage to find takers even the real estate market is down.

 

Conclusion

Debunking home buying myths is crucial because there is no dearth of prospective homebuyers who approach the process with various misconceptions. For example, while some might lead you to believe you’re better off as a renter, you might actually benefit by buying a home instead.

More often than not, working with a realtor or a real estate agency is ideal. This is because you then have a professional doing all the groundwork for you as well as someone you may turn to for advice. Once you decide you wish to buy a home, it’s also important to find a suitable lender and get preapproval. This way, you know just how much money you may get in the form of a loan.

When the COVID-19 pandemic struck, a significant number of people across NYC, as well as other parts of the country, found themselves working from home. Many decided to purchase new homes, partly enabled by historically low interest rates on mortgages. Consequently, home prices started to rise. However, these trends did not last for long, given that mortgage rates doubled in a matter of months during the first half of 2022. While that’s the overall outlook of the country’s housing market, the NYC housing market is no different.

 

The NYC Housing Market in 2022 

Data released by RedFin shows that home prices in New York in December 2022 were 0.32% lower in comparison to the same month in the preceding year, selling at a median price of $790,000. It also highlights that homes stayed on the market for an average of 70 days in comparison to 63 days in 2021. In addition, while December 2021 accounted for 3,901 sales, the number dropped to 2,395 in December 2022.

According to Realtor.com, the median listing price of homes in New York stood at $729,000 in December 2022, an 18.1% year-over-year decrease. Further, the median home selling price was $615,000.

The New York State Association of REALTORS Inc., in its 2022 annual report, shows that the Bronx saw a total of 1,773 closed sales in 2022, which was down 3.6% from 2021. However, the median price in 2022 stood at $470,000, up from $450,000 in 2021. The total number of closed sales in other parts of NYC also saw a decline, and some areas witnessed slight drops in median prices as well.

Moving From 2022 to 2023

With 2022 behind us, buyers are hoping for some positivity. People who wished to buy homes in New York had to deal with rising interest rates, and property prices in most neighborhoods increased as well.

According to the Elliman Report for the second quarter of 2022, the average median sale price stood at a staggering $1,250,000, and the period saw 3,834 closed sales. This was around the same time when mortgage rates were on an upward spiral. Now, there’s been some respite in mortgage rates, and property prices in several parts of New York have fallen fall too.

However, buyers need to understand that the drop in prices does not indicate a much larger shift. This is because unless a recession actually hits, expecting prices to drop drastically might not be the best way forward. If anything, there’s a possibility of NYC housing prices hitting a plateau and mortgage rates stabilizing around 5.5% to 6%, which may help probable homebuyers. Some might even benefit by looking beyond the metropolitan region, even as far as Long Island.

Manhattan Real Estate Prices Chart 2022

Property Shark’s Long Island for the third quarter of 2022 shows that there was a 16% drop in year-over-year transactions and a 5% drop in year-over-year median prices. This is what median prices looked like in different neighborhoods across Manhattan.

• Central Park South: $6,200,000
• Hudson Yards: $4,900,000
• NoHo: $4,062,500
• TriBeCa: $3,450,000
• Hudson Square: $2,740,000
• NoLIta: $2,625,000
• NoMad: $2,209,072
• SoHo: $2,200,000
• Two Bridges: $2,162,690
• Carnegie Hill: $1,950,000
• Chinatown: $1,947,500

NYC Real Estate Market Forecast 2023

The housing market in NYC will continue to witness changes in the coming months, all the more so if interest rates keep dropping at the current pace. Home prices and rents might fall in 2023, although the desired relief for renters might take longer to come. This is because rents grew exponentially in the previous year.

Data from Zumper shows that there was a 20% increase in the median rent of a two-bedroom home from January 2022 to January 2023. Median rents for one-bedroom units increased by 15% during the same time period. With a fair amount of construction activity taking place in New York, people might look forward to an improvement in inventory shortages.

Besides, with a significant number of employees now working from home, Manhattan’s under-utilized office spaces may also present an opportunity to fill housing supply gaps in the city. In addition, even though the NYC real estate market continues to shift, there is no dearth of people who wish to move to this part of the world.

RedFin points out that 3% of the nation’s homebuyers look for homes with the aim of moving to New York from outside of metros. In addition, 73% of homebuyers from New York look for homes with the aim of staying within New York’s metropolitan area. Consequently, it’s safe to assume that prospective buyers won’t disappear completely at any time in the near future, barring a recession-like situation, which might or might not amplify.

Mortgage Rates to Decline

People who’ve signed new mortgages over the last two years probably know of the volatility interest rates experienced after the COVID-19 pandemic struck. Mortgage rates were reducing gradually since the end of 2018, and the pattern continued well into the COVID-19 pandemic.

Interest rates hit an all-time low of around 2.65% for a 30-year fixed-rate mortgage (FRM) in January 2021, and they remained fairly steady throughout the year, peaking at around 3.18%. The period from December 2021 to November 2022 saw a dramatic increase, with interest rates crossing the 7% mark toward the end of October 2022.

Fortunately, interest rates have dropped fairly regularly since then. In the week ending on January 25, 2023, the interest rate of a 30-year FRM stood at around 6.13%. During the course of 2023, one may expect the interest of a 30-year FRM to vary from 5.5% to 6%. A drop in interest rates may play a substantial role in how much you end up paying for a home.

The Federal Reserve’s drive to hike interest rates through 2022 happened with the aim of reigning in inflation, and as inflation continues to slow down, homebuyers may expect further respite in interest rates. However, just how quickly there’s an ease in inflation depends on multiple factors, which include the job market’s resilience. What helps on this front is that the unemployment rate in NYC dropped from 6.7% in December 2021 to 5.3% in December 2022.

If the job market performs even better and if there’s quick relief from inflation, there is a possibility that mortgage rates might fall below 5.5%. However, interest rates may remain stagnant or even increase slightly if inflation is hard to beat.

Besides, since unemployment levels have still not reached pre-pandemic levels, homebuyers might need lower than usual debt-to-income ratios or higher credit scores in order to qualify for the mortgages they seek, even if they plan to go the refinancing way.

Home Prices to Stay Stagnant or Reduce

According to the Zillow Home Value Index (ZHVI), the average home value in New York stood at $782,365 in December 2022, which was a 5.8% year-over-year increase. However, 68.5% of sales took place at less than their listing prices. Besides, the median listing price of homes in New York saw an 18.1% year-over-year decrease from December 2021 to December 2022.

This is not because of a lack of inventory, but mainly because of elevated interest rates and a slowdown in demand that have prevailed over the last few months. However, this year might see fewer listings making their way to the market, and low inventories will ensure that prices do not plummet completely.

The Luxury Apartment Market Faces Pressure

A property report in The Wall Street Journal indicates that the luxury apartment market (of units priced $4 million and over) in NYC witnessed the sale of more than 1,300 units in 2022, accounting for over $10 billion. While the market performed reasonably well in comparison to the last decade, most sales took place before July, and there has been a slowdown in activity since then.  This is not without reason.

People who work in the financial sector have often used their bonuses to make down payments. However, given that there’s been a lull in deal-making, there’s a good chance that people will receive smaller payouts. This, along with a weakening stock market and high interest rates, may well create pressure on NYC’s luxury apartment market. For instance, a number of prospective buyers are choosing to wait and watch unless major life events are driving their needs. In addition, some large apartments have sold for less than their asking prices.

The Wall Street Journal report suggests that a few developers have started offering concessions in different forms. For example, you may find a deal where a developer is willing to cover common charges for up to six months or the costs involved in a temporary buydown of your mortgage’s interest rate.

 

Should You Buy Now or Wait?

Given that there’s been no real stability in the inventory of active listings across New York since the beginning of the COVID-19 pandemic, with there being intermittent ups and downs, this is one aspect that homebuyers might choose to overlook for now. This is because a fair amount of the competition remains glued to the sidelines, so there’s a possibility that prospective buyers might find homes at relatively affordable prices.

People who wish to move forward with their purchases need to account for the fact that there’s no telling which way inflation might go in the near future. As a result, one should ensure having access to enough funds to keep making mortgage payments for at least six and ideally up to 12 months. If you wish to buy a home with the idea of making money when you sell it, make sure you plan to stay in it for at least five years.

Looking for listings that re-enter the market might work well because these homes may come with lower asking prices than they originally did.

Buying a home when inflation is high requires doing the math in advance. If the numbers don’t add up, waiting might be in your best interest because you would not want to put undue pressure on your finances. Besides, not keeping up with your mortgage payments may result in you losing your home to foreclosure, and you might end up financially poorer than when you started out.

While not buying a home might mean continuing to live on rent, you may be in a better position down the line by investing your money suitably and waiting for the market to become more buyer-friendly. However, remember that home prices don’t fall automatically when inflation goes down.

Narrowing Down on a Mortgage Provider

If you decide to buy, it’s important that you select a suitable mortgage provider. For example, a lender should be able to provide you with different alternatives such as conventional mortgages, VA loans, USDA loans, Jumbo Loans as well as a handful of other mortgage solutions. While the interest rate you need to pay requires your attention, so do all associated fees because they can add up to a tidy sum. Customer service levels and flexibility in terms also require your attention.

 

Conclusion

It’s plain to see that the long-term effects of the COVID-19 pandemic, mainly in the form of high interest rates, continue to have a bearing on the NYC housing market, given that 2022 didn’t go particularly well. While median prices have decreased in several parts of New York, the number of closed sales has fallen as well. Since interest rates have started falling and there’s hope that they might go down further, there’s a possibility of more buyers entering the market. This, in turn, might have an effect on NYC housing prices.

If you feel you can afford to buy a home at this point in time and have accounted for unexpected turn of events, you may consider moving forward. This is because while there’s no clear indication of how low interest rates might go, the prices of homes could start rising. Once you decide, make sure you work with a reliable mortgage provider than can guide you through the process.

A reverse mortgage might work well for you if you’re a senior who is in need of cash and you have most of your net worth tied up in home equity. However, understanding the intricacies of these loans and taking a look at the associated costs is crucial because they don’t work equally well for everyone. For example, while a reverse mortgage might help secure your retirement, losing your home to foreclosure is a possibility if you’re not careful with your finances.

 

Numbers Speak

A press release shared through the National Reverse Mortgage Lenders Association website highlights that the housing wealth of seniors (62 years and older) grew by $520 billion or 4.91% in the first quarter of 2022 when compared to the fourth quarter of 2021. It also touched a record high of $11.12 trillion. The release suggests that the main driver behind this rise is an increase in home values by around $563 billion or 4.4%, with a $43 billion or 2.09% increase in the debt that seniors hold working as a compensating factor.

Data released by Statista shows the origination of more than 49,000 home equity conversion mortgages (HECM) in the United States in 2021. This was significantly more than 41,859 in 2020 or 31,274 in 2019. The number hovered between around 48,000 and 60,000 from 2012 to 2018. The period of the Great Recession from 2007 to 2009 saw a significant number of reverse mortgages, with the number reaching a peak of 114,692 in 2009.

While there are predictions of the U.S. going through a recession in 2023, not all financial experts, Goldman Sachs included, are on the same page. Besides, with home prices being on the higher side, it might be a good time for seniors who’re thinking about tapping into their home equity.

 

What is a Reverse Mortgage?

In simple terms, a reverse mortgage lets homeowners who are 62 years of age or older borrow a part of the equity in their homes. The key difference between a regular mortgage and a reverse mortgage is that the mortgage provider pays the homeowner in the case of the latter. The money you receive through this type of mortgage could be tax-free, although you need to consult with a tax advisor.

A reverse mortgage gives you the ability to keep living in your house if you’re having trouble keeping up with your finances and are considering selling because you need the money. The lender receives the funds it provides after everyone in household has passed away, if you sell the home, or if you relocate permanently.

What Are the 3 Types of Reverse Mortgages?

Reverse mortgage solutions come in three basic forms. These include ones insured by the Federal Housing Administration (FHA), proprietary mortgages not insured by the FHA, and single-purpose reverse mortgages provided by state/local governments. FHA-insured home equity conversion mortgages (HECMs) account for the most common type of reverse mortgages.

Home Equity Conversion Mortgages 

The U.S. Department of Housing and Urban Development (HUD) is responsible for creating and regulating HECMs. While mortgage lenders issue these loans, the FHA insures them. FHA receives a mortgage insurance premium (MIP) upon the closing of your loan. This stands at 2% of the appraised value of a home or FHA’s lending limit of $970,800 (the lower of the two).  The insurance is in place to safeguard a borrower in case a lender stops making payments and to protect the lender if the amount received upon selling the home is not enough to repay the mortgage completely.

From 2010 to 2013, borrowers got to choose from two variants, Standard and Saver. A Standard HECM came with a larger loan amount, where proceeds varied from 62% to 77% of a home’s appraised value, and borrowers needed to pay an upfront MIP of 2%. Saver HECMs came with smaller loan amounts, where proceeds varied from 51% to 61% of a home’s appraised value. In this case, borrowers needed to pay just 0.1% as MIP.

Proprietary Reverse Mortgages 

Some lenders provide proprietary reverse mortgages tailored for homeowners who wish to get loans for high-value homes. While these loans are not subject to regulations that govern HECMs, most lenders tend to follow and offer the same consumer protections, with mandatory counseling being a part of the parcel. Since lenders usually provide these mortgages toward homes that value at $1 million or more, referring to them as jumbo reverse mortgages is fairly common. 

Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages offered by some state and local governments require that you use the proceeds you receive through the loan for specific purposes such as paying property taxes or carrying out repairs. These mortgages are typically for low- to moderate-income homeowners. Like proprietary reverse mortgages, these are not FHA-insured.

 

How Does a Reverse Mortgage Work?

Even if you’ve paid off your primary mortgage and own 100% equity in your home, there’s little chance that you might be able to borrow as much as its appraised value. The amount you can borrow depends on various factors in addition to your home’s appraised value. These include the age of the youngest borrower on the application, the HECM mortgage limit, and existing interest rates. For 2023, the HECM mortgage limit stands at $1,089,300.

Borrowers usually receive higher loan amounts as they grow older, and low interest rates also play a favorable role in the amount you may receive. In addition, you may qualify for a higher loan amount through a variable-rate reverse mortgage when compared to a fixed-rate alternative. 

If you opt for a fixed-rate HECM, you receive a single lump-sum payment. With variable-rate HECMs, you may choose to receive the funds in different ways.

• Receive equal monthly payments if at least one of the borrowers uses the home as his/her primary residence.
• Receive equal monthly payments for a predetermined time period.
• Get access to a line of credit that runs until you max it out.
• Receive equal monthly payments and get access to a line of credit until you keep living in the home.
• Receive equal monthly payments and get access to a line of credit for a predetermined time period.

Much like a regular mortgage, interest on a reverse mortgage keeps accruing every month. In addition, you also need to account for the money you’ll need to cover ongoing maintenance costs, homeowner’s insurance, and property taxes.

Using a HECM to Buy a New Home

Seniors may think about buying a new home by looking at what a HECM for Purchase mortgage has to offer. In this case, you get the freedom to decide how much money you wish to pay each month, with not needing to make any payments also being an option.

The Three-Day Right to Cancel

Most reverse mortgage companies give you the right to cancel the agreement within three business days of the loan’s closing without incurring any penalties. If you wish to make use of this right to rescission, you need to notify your lender in writing. As a result, it’s best that send your cancellation notice by certified mail and keep the return receipt. Once the lender receives your notice, it gets 20 days to return any money you might have paid in the form of fees or charges.

 

Pros and Cons of a Reverse Mortgage

Getting a reverse mortgage comes with its share of possible pros and cons. For example, if you’re having trouble meeting your financial obligations, a reverse mortgage might be an effective way to secure your future. However, getting one is not free and comes with various fees and charges. 

The other benefits of getting a reverse mortgage include:

• You may keep living in your house instead of selling it to get the money you need.
• You may use proceeds from a reverse mortgage to pay off your existing mortgage.
• The money you receive through a reverse mortgage is tax-free.
• You or your heirs don’t have to worry about paying any balance if the amount your home sells for is less than the amount owed toward the reverse mortgage.

If you’re wondering what the downside to a reverse mortgage is, here’s what you need to know.

• You face the risk of losing your home to foreclosure if you’re unable to keep up with property taxes, HOA fees, homeowners insurance, and other costs related to being a homeowner.
• Foreclosure is also a possibility if you don’t occupy the home in question as your primary residence.
• Since a reverse mortgage lowers the equity you have in your home, your heirs stand to inherit less.
• Getting a reverse mortgage might have an effect on you being able to qualify for government programs such as Supplemental Security Income (SSI) and Medicaid. 

What Are the Eligibility Criteria?

Not everyone who owns a home and is over 62 years of age may qualify for a reverse mortgage. The other eligibility criteria include:

• You use the home as your primary residence and spend most part of the year there.
• You’ve paid off your mortgage completely or have a low outstanding balance.
• You don’t have any federal debt such as a student loan or outstanding income taxes.
• You have adequate funds to keep meeting the costs of being a homeowner or agree to use part of the proceeds from the reverse mortgage for the same.
• Your home meets the required standards.
• You go through the required counseling from a HUD-approved agency.

 

Is a Reverse Mortgage Right for You?

It’s common for some people to confuse reverse mortgages with home equity loans and home equity lines of credit (HELOCs). While both give you access to funds based on the equity you’ve built in your home, the similarity ends there. This is because you don’t need good or excellent credit to qualify for a reverse mortgage, and you don’t need to make repayments until you sell your home or die. 

A reverse mortgage might work well in giving you access to your home equity without selling it if you:

• Don’t want the hassle of making monthly repayments
• Cannot afford to make monthly repayments
• Are unable to qualify for cash-out refinance or a HELOC

 

Reverse Mortgage Scams You Need to Avoid

If a contractor suggests getting a reverse mortgage so you might be able to pay for repair work easily, it’s reason enough to be wary. This is because contractor scams related to reverse mortgages are not uncommon, where they try to pressurize unwitting seniors into getting expensive reverse mortgages.

It’s also important to steer clear of ads that claim to offer special reverse mortgage deals for veterans, imply approval from the Department of Veteran Affairs (VA), or offer payment-free alternatives. Bear in mind that every reverse mortgage comes at a cost.

Who Owns the House in a Reverse Mortgage?

When you get a reverse mortgage, the title of the home remains in your name. This is why you continue to remain liable for paying property taxes, homeowner’s insurance, HOA fees, and maintenance-related costs. If you default on any of these payments or fail to maintain your home in the right manner, the lender may choose to foreclose on the home. Once foreclosure proceedings are complete, the lender takes possession of the home and becomes its legal owner.

 

Conclusion

Just like there are alternatives to the traditional mortgage, people thinking about getting reverse mortgages have other options too. For instance, if you’re okay with making monthly payments, you may look at what home equity loans and HELOCs have to offer. If you still have an existing mortgage, you may consider refinancing it after comparing interest rates. Downsizing might also be an option if you can do with a smaller space, as you’ll get a new home and some extra money.

If you’ve decided to move forward the reverse mortgage path, it’s important that you partner with a reliable lender. If you’re wondering how to choose the right mortgage provider, bear in mind that you need to look at factors such as interest rates, flexibility, and the level of customer service you receive.

Can changing jobs while buying a house have an effect on your ability to get a mortgage? The short answer to this is yes, even if you’ve already received pre-approval. This is because your income and employment history play key roles in your ability to qualify for a mortgage. However, a change in employment does not necessarily have a negative impact on the home buying process. For example, if you move to a better paying documented job, you might not face any disruptions in the approval of your mortgage.

 

Employment and Income From the Lender’s Perspective

Unless your job comes with an end employment date, you may expect a mortgage provider to view it as ongoing and permanent. If you’re wondering how long you have to be at a job to get a mortgage, with most types of mortgages, you need to show a two-year work history. If you’ve worked at the same job or in the same industry for two years or more, you typically don’t need to answer any more questions on this front.

If you wish to get a mortgage without two years of work history, you may expect mortgage providers to look at various aspects. These include:

• Your qualifications
• The financial health of your employer and its industry
• Periods and reasons of unemployment
• The frequency at which you change jobs
• Any recent increase in pay/responsibilities

 

What Mortgage Providers Wish to Know About Job Changes

Getting approved for a mortgage usually requires that you provide at least a two-year work history. If the time you’ve spent at your existing job falls short of this mark, or if you’ve switched jobs recently, you may expect your mortgage provider to seek more information. Most importantly, your lender would want to know what impact the change has had on your income, and thereby, your ability to make repayments.

Your lender might ask you why you changed your job. If you’ve changed jobs multiple times over a short span of time, you might need to explain the reason.  

You may actually change your job a few weeks or months before you begin the process of getting a mortgage without it affecting the outcome of the process, provided it comes in the form of a better position or higher pay.  However, if a lender looks at your new job less promisingly than you do, you might have trouble getting the desired mortgage.

 

Can You Change Jobs While Buying a House?

Changing jobs while buying a house, especially if you’ve already applied for a mortgage, may lead to delays, and it also brings with it the possibility of a reversal in the lender’s decision. Once you switch jobs, underwriters need to take a complete relook at your application, basing it on details from your new job. Besides, depending on the type of switch you make, a lender might view the stability of your employment.

If you’ve changed your job after receiving preapproval, proactively informing your lender about it and providing the offer letter, a written Verification of Employment (VOE), and your most recent pay stub is a good idea. Even in this case, you may expect some delays.

 

Acceptable and Inappropriate Job Changes

Just what happens if you change jobs while buying a house depends on what the switch entails. In case you think that your loan officer might view the change as a red flag, you may want to delay changing the job until the closing is complete.

Acceptable Changes

Some instances of job changes don’t hamper the loan application process.

Higher income, same industry.

Consider this – you’ve been working at the same hotel for over 10 years, and you have a job offer from a competitor that comes with a 20% increase in income. In this case, you check all the basic parameters for getting a mortgage. You have work history that is more than two years, you’ve held on to your last job for a while, your new job belongs to the same industry, and your industry (hospitality) is fairly stable. If anything, the hike in pay will only work as a plus.

Moving to the next level.

If your new job involves moving up the ladder, such as advancing from being the vice-principal of a school to a principal, a lender would view this change as favorable, all the more so if the new job comes with a lengthy contract.

 

Inappropriate Changes

Even if your new job pays you more than your existing one, it’s not necessary that a lender would look at it with favor. For example, letting go of a salaried job to work on a commission or bonus structure might not bode well with your lender even if the latter involves making more money than you do now. This is also the case if you switch from being a W-2 employee to a contract employee or a self-employed individual, because it interrupts the paper trail of your work history.

Moving to a different industry, taking up a lower position, or switching to a job that comes with no change in pay or responsibilities might get your lender to think twice. If your new job comes with a preset termination date of three to five years, it’s reason enough for your lender to be wary. A lender might also refrain from approving your application if it feels you can’t hold on to the same job for an extended duration and are prone to job hopping.

 

What Else You Should Not Do While Getting a Mortgage

While changing jobs when trying to buy a house might not have a detrimental effect on the process, there are a few things you should avoid, not just before applying for a mortgage, but until the closing is complete. This is because your mortgage provider may pull your credit report at any point until this stage.

Steer Clear of Making Large Purchases

You should ideally avoid making large purchases before or during the home buying process, no matter whether you pay for it using credit or cash. If you make a large purchase on credit, it has an adverse effect on your credit utilization rate and debt-to-income (DTI) ratio, both of which play crucial roles in determining your creditworthiness. If you pay for a large purchase with cash, it brings down the amount you may put toward your home’s down payment. Consequently, it’s best that you delay making any large purchase until the closing of your mortgage.

 

Refrain From Opening New Forms of Credit

Every time you apply for any type of credit, be it a credit card or a personal loan, your credit score drops by a few points. Given that a mortgage provider can pull your credit report at any time before the loan’s closing, a negative change in your credit report may have an adverse effect on the approval of the loan or the terms you get.

For example, a slight drop in your credit score may get it to move from excellent to very good, or from good to fair. In case of your former, your lender might still offer you the mortgage, but with a higher interest rate. In case of the latter, it may even choose to withdraw its offer completely.

This also applies when it comes to co-signing a loan, because, you, in essence, are a co-borrower, and the lender will pull your credit report. If you co-sign on a loan, you may expect it to increase your DTI ratio. Co-signing a credit card will have a bearing on your credit utilization rate. Besides, if the primary borrower misses making payments or defaults on the loan, it will have a negative effect of your credit score.

 

Closing Existing Revolving Forms of Credit

While paying off your debt is great, you might want to think twice before closing any revolving forms of credit. These include credit cards as well as lines of credit. Closing an existing credit card (or line of credit) brings down the average age of your credit accounts, and the older the account, the more pronounced the effect.  In addition, closing an existing account may increase your credit utilization rate, which, in turn, has a negative effect on your credit score. As a result, if you plan to close any type of revolving credit account, consider waiting until the closing of your mortgage.

Missing Making Payments

Payment history plays a key role in the calculation of your credit score so it’s crucial that you make all your payments on time. These include credit card and loan payments as well as utility bills. Remember that even a single late payment has a negative effect on your credit score, and this can be a bigger problem than you imagine if it happens after the pre-approval of your mortgage and before its closing.

 

Depositing a Lot of Money

If you’re making a large deposit into your bank account during the process of getting a mortgage, you may expect extra scrutiny. While payroll deposits and bank account transfers are typically alright, prepare to offer an explanation if you’re making any other type of large deposit. Even if you have a perfectly valid reason, the to-and-fro usually leads to slowing down of the process.

The reason for the scrutiny is lenders wish to ensure that the money comes from a legitimate and documented source. If the deposit comes with a paper trail, you’re usually good to go. If you’re anticipating receiving a gift to help with your down payment or plan to deposit cash that you’ve been saving for years, it’s best that you inform your loan officer about it at the onset to avoid any complications at a later stage. If you don’t plan to use the money for down payment, consider putting off depositing it into your account until the closing of the mortgage.

 

Not Anticipating Right

A 2021 Bankrate/YouGov survey shows that 33% of baby boomer buyers (57 years to 75 years old) have some regrets about the home they purchase, and this number increases to 64% with millennial homebuyers (25 years to 40 years old). While 21% of millennials said that maintenance costs are higher than estimated, 13% feel that their mortgage payments are too high. 13% of millennials also think that they end up overpaying for their houses.

Bear in mind that once you buy a house, it’s not easy to recuperate your money by hoping to sell it quickly. In fact, if you have to sell your home because you can’t keep up with your mortgage payments, there’s a possibility that you’ll end up losing money in the process because of all the fees and taxes associated with buying and selling a home.  Therefore, it’s crucial to determine how expensive a house you can actually afford before you apply for a mortgage.

 

Not Knowing How Loan Points and PMI Work

You should ideally understand how private mortgage insurance (PMI) and loan points work before applying for a mortgage. Loan points let lenders reduce the interest rates of loans and are typically best used if you plan to live in the home you purchase for seven years or more. PMI, on the other hand, lets you pay less than 20% as down payment. You stop making payments toward your PMI once you acquire 20% equity in your home.

 

Conclusion

Changing a job shortly before or after you apply for a mortgage typically does not have an adverse affect if the switch entails a higher paying job in the same industry. However, if you move to being a contract employee from a W-2 employee or move to a new industry, your lender might not view the switch with favor.

It’s also important that you refrain from making large purchases, applying for new forms of credit, and being lax about your creditworthiness. Calculating just how much money you’ll need to spend as a homeowner is equally important. If you’re in doubt about any financial aspect of buying a home, it’s ideal that you discuss every aspect with your mortgage provider ahead of time.

Home equity refers to the money that’s tied up in your home. It’s common for people who have considerable equity in their homes to use part of it for various purposes, some of which include carrying out renovations, buying a new home, and paying for children’s education. If you’ve reached a stage where you’re thinking about how to use equity in your home, know that while you get a few alternatives, there’s no single best option that suits everyone equally well.

 

What is Home Equity?

Home equity is a numerical representation of the financial interest a homeowner has in a home. Simply put, it is the difference between a home’s existing market value and any attached mortgages/liens. If you purchase a home using a mortgage, the mortgage provider will continue to hold a financial interest in the property until you repay the mortgage completely. 

The equity you hold in a home begins with the down payment you make. It continues to increase as you keep making payments toward your mortgage. This is because your mortgage provider would assign a percentage of your monthly payment to bring down the outstanding principal amount. 

While the amount your pay toward your mortgage has an effect on the equity you hold in your home, so does the property’s existing market value. For example, if there’s a drop in property prices, you may expect your home equity to reduce, and the converse holds true as well.

Where the Market Stands

Data shared by the Federal Reserve Bank of St. Louis shows that there has been a significant uptick in owners’ equity in real estate from the first quarter of 2020, when it stood at $20.09 trillion. By the second quarter of 2022, this number moved to $29.03 trillion. 

According to the National Association of REALTORS, as of the fourth quarter of 2021 and over the preceding 30 years, sale prices of existing single-family homes have increased by 4.3% annually. In the last 10 years, home prices have risen at an annual rate of 8.3%.

Further, data from ATTOM’s 2021 U.S. Home Equity & Underwater Report indicates that:

• 41.9% of mortgaged homes in the U.S. are equity-rich (owners have at least 50% equity).
• Only 3.1% of mortgaged homes in the country are “seriously underwater” (combined loan balances linked to a home exceed its market value by 25% or more).
• Idaho has the largest percentage of equity-rich mortgaged homes (66.7%), followed by Vermont (64.8 %) and Utah (62.5 %).

 

Determining How Much Home Equity You Have

Before you think about how to access home equity, you need to determine how much equity you’ve built since you purchased your home. Calculating how much equity you have is fairly simple.  All you need to do is subtract the amount you owe toward your mortgage from the home’s existing appraised value. For example, if the appraised value of your home is $160,000 and you still need to repay $40,000 toward your mortgage, your equity in the home stands at $120,000. 

While the COVID-19 pandemic has led to a rise in residential property prices and helped homeowners build more wealth, they get just three basic ways of tapping into home equity if they don’t want to sell.

How to Use Home Equity

If you’re wondering how to tap into home equity, your options include going the cash-out refinancing way, getting a home equity line of credit (HELOC), or getting a home equity loan. While all three may give you access to the funds you require, they function in different ways and come with varied loan terms. What’s common between all three is you’ll need to repay the money by the end of the loan term or when you sell your house, whichever takes place first.

Cash-Out Refinancing

If you opt for cash-out refinancing, you basically take on a new mortgage for an amount that exceeds how much you owe toward your existing mortgage.  This gives you the ability to access your homes equity and you may use the money you receive for practically any purpose.  Cash-out refinancing works in the same basic manner as refinancing a mortgage. The difference between the two is that the former gives you access to the extra funds you need. 

This method might work well for you if you manage to get a lower interest rate than that of your existing mortgage and use the funds you receive in a suitable manner. Bear in mind that most lenders who provide cash-out refinancing require that you retain at least 20% equity in your home at the end of the process.  

Consider this example if you wish to know how to tap into home equity by using this method. You own a home with an existing market value is $200,000, and you still owe $100,000 toward your mortgage. This means your equity in the home is $100,000. Given that you may need to maintain 20% equity after cash-out refinancing, you might be able to borrow up to $80,000. Some lenders let you go below the 20% mark, in which case you’ll need to get private mortgage insurance (PMI).

One of the benefits of opting for cash-out refinancing is that it gives you access to the money you need for practically any legitimate purpose. You might also stand to gain if your new mortgage comes with a noticeably lower interest rate than your existing mortgage. However, getting a higher interest rate than that of your existing mortgage is a possible disadvantage. You’ll also need to account for closing costs that are similar to ones linked with getting a mortgage. 

HELOCs

A home equity line of credit (HELOC) gives you the ability to borrow against the equity you’ve built in your home, and your equity serves as collateral for the revolving line of credit you receive.  Getting a HELOC is also possible if you’re the outright owner of your home. Much like a credit card, the line of credit replenishes each time you make a repayment. 

Borrowers typically get up to 10 years to draw funds from their HELOCs, during which time they’re required to make interest-only payments. However, you may also choose to make payments toward the principal amount during this period. Usually, a 20-year repayment period follows, during which borrowers need to repay the principal amount along with interest.

More often than not, HELOCs come with variable interest rates that may change based on prevailing market conditions. However, some lenders give you the option of converting a part of your balance to a fixed rate. In some cases, HELOCs shift to fixed-rate structures after the end of the draw period.

As with cash-out refinancing, most HELOC providers require that you maintain at least 20% equity in the home after you receive the funds that you seek. 

A distinct benefit of getting a HELOC is that you pay interest only toward the amount you draw, and not the entire credit line. Besides, since the credit line replenishes each time you make a repayment, you get the ability to keep your outstanding balance low. HELOCs tend to come with lower interest rates than traditional mortgages, and there’s a possibility that the interest you pay might be tax deductible. Besides, HELOCs come with no or low closing costs.

The fact that HELOCs typically come with variable interest rates might work as a drawback for some because of the unpredictability factor, especially if interest rates increase in the future. Besides, if you stick to making interest-only payments during the draw period, you’ll need to plan your finances suitably to ensure that once the larger repayments start, you have the resources to keep making payments on time. Remember that defaulting on a HELOC may result in foreclosure.

Home Equity Loan

A home equity loan functions in the same basic manner as a mortgage, which is why some people refer to it as a second mortgage. A lender would rely on the equity you’ve built in your house to serve as collateral. The amount you may qualify to borrow depends on the equity you’ve built in your house, although most lenders require that you hold on to at least 20% equity after lending you the money. The term of a home equity loan typically varies from 20 to 30 years.  

Since a home equity loan does not replace an existing mortgage, people who have existing mortgages with low interest rates might benefit by opting for this alternative. In addition, home equity loans tend to come with fixed interest rates, which helps provide predictability. Another benefit is that the interest you pay might be tax-deductible.

One drawback with home equity loans is that they might have higher interest rates than cash-out refinancing alternatives. You will, in all likelihood, also need to account for closing costs. If you default on your loan, your lender might choose to collect the amount you owe by going the foreclosure way.

Best Way to Use Home Equity

There are different ways to make use of the equity you build in a home. For example, you could use the money you get to renovate your home, buy another home, fund your retirement, or pay for your children’s education. There is no single best way to use your home equity because requirements tend to vary based on individual circumstances.

How to Use Equity in Your Home to Renovate?

If you’re not sure about how much your renovation project might cost or feel that you might have ongoing costs over a prolonged period, a HELOC might be the way to go. However, a home equity loan might work better if you’re worried about rising interest rates. You may want to consider cash-out refinancing only if you get a lower interest rate than that of your existing mortgage. You also get a couple of home renovation refinancing options from which to choose. 

Using Equity in Your Home for Retirement

People who wish to use the equity in their homes to get through their retirement years more comfortably may think about getting HELOCs, home equity loans, or reverse mortgages. A reverse mortgage does not require making any monthly payments. Instead, a lender would provide a stream of payments to you, bringing down the equity you hold in stages. The lender would receive what you owe when you sell the property or upon your passing away. You need to be at least 62 years old to qualify for a reverse mortgage that’s insured by the Federal Housing Administration (FHA)

Using Equity in Your Home to Buy Another Property

If you’ve built substantial equity in your home, you may think about using it to buy a new home. No matter whether you get a home equity loan, a HELOC, or cash-out refinancing, you will be putting your primary residence at risk in case you’re unable to make your repayments in a timely manner.

 A HELOC might work well for you if you need some money to make the down payment and might need more to make renovations down the line. Home equity loans, on the other hand, offer more predictability in repayments through fixed interest rates. If you’re over 62 years of age, you may consider getting a home equity conversion mortgage (HECM), which is essentially a federally insured reverse mortgage.

 

Conclusion

It’s common for lenders to place a maximum limit on the amount you may borrow through a home equity loan, a HELOC, or cash-out refinancing, and most require that you retain at least 20% equity in your home at all times. If you’re wondering what the best way to tap into home equity is, bear in mind that it depends on your specific requirements. For example, if you plan to use the funds you receive for a long-drawn renovation project, you might be better off getting a HELOC instead of a home equity loan.

Remember that tapping into home equity requires that you build enough equity first, and you may start by making a large down payment. Going forward, you may build equity faster by making more than the required monthly payment. Once you build reasonable equity in your home, you may think about borrowing money against it to use for different purposes. When you get to this stage, it’s important that you find a reliable lender that specializes in this realm. 

How much house you can afford to buy typically boils down to how much of a mortgage you can afford to repay. This is because most Americans turn to mortgages when it comes to becoming homeowners.  So, if you plan to purchase a home in the near future, it’s important to determine how much you may afford to borrow based on your existing salary and other factors.

While there’s a clear link between the two, the answer to “How much house can I afford?” is usually not the same as the answer to “How much mortgage can I afford?”

Even if a lender is willing to lend you enough money to buy a house you like, you need to bear in mind that you’ll need to keep making payments regularly and subsist on the rest of your salary until you pay off the mortgage completely. You also need to account for any unexpected expenses that you’ll need to encounter along the way.

How Much Home Can I Afford With My Salary?

Before you think about getting on the path to purchasing a home, you need to establish if you’re better off as a renter or a homeowner.  For instance, while buying a home gives you the ability to build equity, not making payments on time comes with the risk of foreclosure. If you have job security and have been consistent in making rent and bill payments, you may think about buying a home.

There are two ways to look at how much you can afford for a mortgage. One rule of thumb suggests that the mortgage amount should not exceed your annual income by more than two and a half times. For example, if you earn $100,000 a year, you may seek a mortgage of up to $250,000.

Another line of thought opines that your monthly mortgage payment should remain less than 30% of your gross monthly income, and this is something lenders look at as well. However, mortgage essentially look at your income and existing debts to arrive at a decision, and they overlook additional costs that might come in the form of income tax, health insurance premiums, saving for children’s college, and pre-tax retirement contributions.

Consequently, limiting your mortgage payments to less than 25% of your monthly income can help you steer clear of being house poor. Data released by Consumer Affairs indicates that:

• 69% of homeowners in the United States feel house poor
• Three out of five homeowners afford housing costs by not making essential home-related purchases
• Three out of five homeowners are wrong in their expectations of repair and maintenance costs

If paying off your mortgage and maintaining a home account for a significant portion of your income, you might end up with inadequate money to meet discretionary expenses or save for retirement. Remember, an approved mortgage does not imply that it’s an affordable mortgage. 

How Expensive of a House Can I Afford With a VA Loan?

Eligible applicants may qualify for VA loans if the total of their monthly debt and mortgage payments, or their debt-to-income (DTI) ratio, does not exceed 41% of their gross monthly income. 

While qualified veterans with full VA loan entitlement don’t have to worry about loan limits, this is not the case with veterans who qualify for reduced VA loan entitlement. In 2022, the standard VA loan limit for most counties across the country stood at $647,200.

How Expensive of a House Can I Afford With a USDA Loan?

Qualifying for a USDA loan requires that you have a DTI ratio of 41% or lower. You might qualify with a higher DTI ratio only in case of significant compensating factors, as listed by the U.S. Department of Agriculture (USDA). 

The maximum you may borrow through a USDA loan depends on the county in which you wish to purchase a home. As of March 2022, this number stood at $336,500 for most counties. For Duchess County in New York, the maximum limit was $581,200. The maximum limit for Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, and Sussex counties in New Jersey was $776,600

 

What Factors Affect Affordability?

Technically, affordability when buying a home depends on your income, home prices, mortgage rates, and monthly mortgage repayments. However, if you find yourself asking, “How much can I afford for a house?” you need to account for a few other factors too.

Income

This includes income that you receive from all sources on a regular basis. Your income plays an important role in determining how much you may afford to spend toward mortgage payments each month.

Expenses and debt

Looking at all your debt payments and regular expenses gives you an indication of how much money you have left over from your income to make mortgage payments.

Savings

Your savings help you make your down payment, so the more you have the better. In addition, you might also need to turn to your savings to meet unforeseen expenses.

Creditworthiness

Your credit score and the debt you owe give lenders an indication of the level of risk you pose as a borrower. This factor plays a key role in whether a lender approves you for a mortgage. It also has a significant effect on the interest rate you get.

Lifestyle

Given that a significant number of homeowners end up cutting costs in various forms, it’s important to determine if you’re willing to make lifestyle changes and live on a tighter budget. If you already have considerable debt and don’t see yourself wanting to cut back on existing expenses, you might want to err on the side of caution.

Personality

In Pulp Fiction, when Jules (Samuel L. Jackson) tells Vincent (John Travolta) that “Personality goes a long way,” he seems rather convincing. That’s probably because it’s true to some degree according to a research article on Candidate Personality Traits, Voters’ Profile, and Perceived Likeability. 

From the point of view of buying a home, while some borrowers might be okay with the knowledge that they need to pay upward of $5,000 per month toward their mortgages each month, others might spend sleepless nights over significantly smaller payments. Besides, while some might feel perfectly at ease when refinancing their mortgages, the process might seem perturbing to others. 

As a result, it’s important to determine just how much you’re okay with borrowing without letting it affect your mental well-being.

 

What Do Mortgage Providers Look At?

Mortgage providers tend to follow different criteria when determining affordability, loan amounts, and interest rates. However, the basics remain the same. You may expect a lender to look at your existing income, debt, and assets, as well as the potential of increased income and debt in the future. 

While income, expenses, and the down payment amount have a bearing on how much a lender might be willing to lend, your credit history plays an important role in your ability to qualify for a mortgage and the interest rate.

The Effect of Debt-to-Income Ratio on Affordability

An important factor that lenders look at to determine how much of a mortgage you can afford, your debt-to-income ratio highlights how much you owe each month in comparison to your gross monthly income. Other than your debt, it takes the rent you pay into account if you don’t have a mortgage. Lenders typically look for debt-to-income ratios of 36% or lower. Of this, your rent or mortgage payment should ideally account for 28% or less. 

People with DTI ratios of 43% or higher can find it rather challenging to get a mortgage. In this case, you might want to improve your DTI ratio before you apply for a mortgage.

What’s the Actual Cost of Homeownership?

Arriving at an answer to how much house you can afford requires that you understand the actual cost of homeownership. This is because there’s typically more than what meets the eye, and if you only prepare to make monthly mortgage payments, you might be in for disappointment. Besides, knowing all the associated costs will help you make a better decision.

• Property taxes. If you get a mortgage, you typically need to pay property taxes in the form of installments added to your monthly payments to your mortgage provider, who then makes the payments on your behalf. Just how much you need to pay depends on where you live. Data collated by the Motley Fool indicates that property taxes are highest in New Jersey, at 2.13%. For New York, this number stands at 1.32%.
• Homeowners insurance. It’s common for lenders to require that you get homeowners insurance, and there’s a good chance that your lender will make these payments on your behalf through an escrow account. While homeowners insurance provides financial cover against losses and damages, it might not cover floods in flood-prone areas. In such instances, you might need to pay extra for flood insurance. According to Policygenius, the average cost of homeowners insurance in the U.S. stood at around $1,900 per year in 2022.
• Mortgage insurance. If you pay less than 20% of a home’s selling price as down payment on a conventional mortgage, there’s a good chance you’ll need to get private mortgage insurance (PMI).Mortgage insurance helps lower the risk that lenders face when lending to people who make low down payments. While you might need to add these premiums to your monthly mortgage payments, you may also have the option to make a one-time premium at the time of closing instead.
• Closing costs. Closing costs refer to expenses that buyers and sellers incur during the transfer of a property’s ownership. As a buyer, you are responsible to pay all mortgage-related closing costs. A seller, on the other hand, needs to pay fees incurred in the transfer of the title as well as real estate agent commissions. How much you need to pay toward closing costs depends on a home’s selling price, the mortgage provider you select, the type of mortgage you get, and the state in which you purchase a home. Typically, closing costs vary between 2% and 6% of a home’s selling price.
• Condo/HOA fees. If you purchase a home that’s part of a condominium association or a homeowners’ association (HOA), prepare to shell out a monthly or quarterly fee.  These fees may vary significantly from one association to the next based on the location and the amenities/services on offer.  Condominium and homeowners’ associations charge this fee to cover expenses related to maintenance, building insurance, garbage collection, community swimming pools, and more.
• Maintenance. As a renter, you’ve probably never had to worry about your home’s maintenance-related costs. This changes once you become a homeowner. These expenses may range from major to minor, from fixing roofs to replacing old fixtures. The general rule of thumb is that you may expect to spend 1% to 2% of a home’s selling price toward its maintenance each year. However, this number can be significantly higher for older homes.
• Mortgage points. You may choose to pay for this optional expense to get your lender to reduce the interest rate of your mortgage. One point is equal to one percent of the mortgage amount. For example, one point on a $150,000 mortgage would amount to $1,500. Paying extra for points when you get a mortgage may lead to long-term savings. However, this might not be the case if you have limited cash. Besides, you may benefit more by making a larger-than-planned down payment. 

 

Conclusion

When asking yourself, “How much house can I afford?” make sure you take all your existing financial obligations and income into consideration. Remember that you need to account for any unexpected expenses that might come your way, and you should ideally have a savings fund that can cover at least six months of your expenses. 

If you’re still not sure about how much you can afford for a mortgage, consider discussing your specific situation with a qualified loan officer.

With inflation affecting most purchases, be it at the grocery store or the gas station, an increasing number of Americans are feeling the pinch on their pockets. Since there’s no definite way to tell when some respite might be in the offing, it’s only fair for people to wonder if now’s the right time to buy a home. 

 

The Effect of Inflation on Buying a Home

The effect that inflation has on the dollar is fairly straightforward. Rising consumer prices result in reduced spending power, with the dollar losing its value. Data released by the Bureau of Labor Statistics shows that Consumer Price Index for all items increased by 8.5% in the 12 months preceding July 2022. 

According to the National Association of REALTORS (NAR), median prices of homes across the country in the second quarter of 2022 increased by 14.2% year over year.  Anyone whose income has not increased similarly during this period might have to account for the dollar’s decreased buying power. It becomes particularly important to avoid stretching your budget too much, given that paying off a mortgage is usually a long-drawn affair.

The Effect on Mortgage Rates

While the Federal Reserve continues to tighten monetary policies with the aim of combating high inflation, mortgage rates are almost steadily on the rise.  When the Federal Reserve first signaled its intention of increasing short-term rates at the beginning of 2022, the average interest rate on a 30-year fixed-rate mortgage stood below 3.5%. In the week ending September 7, 2022, it was 5.89%.  

Inflation is one of the key factors that have resulted in higher mortgage rates since the start of the year, all the more so because investors factor in what they consider to be an inflation premium. Besides, if the dollar continues to lose its value as people repay their mortgages, it’s normal for lenders to want to charge higher interest rates. However, buyers who wish to keep their intended monthly payments the same might have to settle for lower-priced homes.

Some experts are of the opinion that rising inflation and interest rates will have a significant impact on housing affordability. This might make buying a home particularly challenging for people with tight or limited budgets. 

 

5 Tips to Buy a Home During High Inflation

There is no surefire way to steer clear of inflation’s ill effects, but there are things you can do to minimize the impact. For instance, if you have a preapproval in place, you may use the summer months to look at what’s on offer. This is because buyers tend to thin out during this period owing to travel and vacation plans. If you, on the other hand, plan to buy a home in the fall, you may expect bidding wars in hot markets. 

1. Buy Quickly

Many experts are of the opinion that more Fed rate hikes are in the offing and the trend may well continue into 2023. From the buyers’ perspective, time can be of the essence if they don’t want affordability to take a further hit. With there being no slowing down in inflation, it’s safe to assume that the dollar is worth more now than it might be next year or the year after.  Besides, if the upward trend in property prices continues, buying a home is bound to get more expensive in the future.

Buying a home in the near future can help existing renters avoid escalating rent payments. A report released by HouseCanary shows that rent prices have increased by 13.4% from the first half of 2021 to the first half of 2022.  Now, the national average for single-family homes stands at $2,495 per month. 

If you wait with the hope of lower interest rates, a drop in property prices, or being able to save more money, you might be in for a disappointment because of the different variables at play.

2. Rethink Your Budget

A good place to start is determining the maximum amount you can afford in the form of monthly payments. It’s important to establish your overall budget and look for homes accordingly. Homebuyers who plan to spend more than they originally intended need to account for a larger down payment. 

Rising prices of consumer goods as well as a higher cost of living need your attention. Costs related to homeowners’ insurance, property taxes, moving, and remodeling may also increase enough to disrupt your budget. When it comes to affordability, it’s important to determine when you need to walk away.

3. Reassess Your Strategy

Once you tweak your home buying budget, you might benefit by giving your strategy of buying a home another look. This could involve looking at homes in less-demand, and probably, more rural areas. Looking at smaller homes or those selling for lower prices might also be beneficial. However, if you’re buying a home as a first-time fixer-upper, you need to exercise due caution. Bear in mind that labor and building material costs are on the rise as well, and fixing a home may cost you considerably more than it did a couple of years ago.

4. Look at Your Credit Score and Finances

To get the lowest possible interest rates, you need to have an excellent credit score, ideally over 740. Lower interest rates translate into lower monthly payments. Improving your credit score in a short span of time can be tough, although you can try by repaying all or most of your outstanding debt as quickly as possible. Look for errors in your credit reports. If you find any, get them fixed. 

If your existing finances permit, try making a large down payment. Since this minimizes the risk a lender faces, you might qualify for a lower interest rate. 

5. Consider Different Alternatives

If you wish to minimize the impact of inflation on your home buying, it’s crucial that you select the right mortgage. Given the scores of alternatives on offer, getting a 30-year fixed-rate mortgage with a 20% down payment might not be the best idea. For instance, buyers who know they won’t live in the homes they purchase for long might benefit by looking at what adjustable-rate mortgages (ARMs) have to offer. Understanding how different types of interest rates and loan terms work places you in a better position to make a decision.

Some mortgages come with low or no down payment requirements, and these may help minimize the impact of inflation for homebuyers who qualify. Whether or not you need to pay extra toward mortgage insurance also needs your attention.

 

Should You Wait?

According to a recent forecast by Kiplinger, price inflation around the end of 2022 could hover around the 8% mark.  So, should you wait for inflation to ease before you buy a home? If you feel the numbers don’t work in your favor, it might be best to wait, all the more so if you’re buying your first home. 

Even though this might come at the cost of not being able to build equity as fast, you might be better placed in the future after you’ve given your money the opportunity to grow in other ways and the market becomes more favorable for buyers.

Bear in mind that a drop in inflation levels does not mean that home prices will drop too. However, a period during which home prices don’t increase by much might give you the opportunity to benefit through a higher income down the line. 

Should You Buy Now?

Data released by the National Association of REALTORS shows that the inventory of active listings in the U.S. has increased by 26.6% from August 2021 to August 2022. This gives prospective home buyers more options than they had a year ago. Besides, with the competition being slightly distracted, there’s a good chance you might be able to find a home you like at a price you can afford.

If you plan to buy a house now, you need to determine if you’ll be able to keep up with your monthly payments over a period of time. It’s also important for you to stay in the home you purchase for five or more years if you plan to make any kind of money when you sell.

Prospective homebuyers should ideally keep a close eye on listings that re-enter the market. This is because a home that’s made it back to the market might come with a lower asking price than before. It’s not uncommon for listings to re-enter the market because deals don’t go through owing to various reasons. 

Making the Most of Your Money

Once you decide to buy a home, you may follow different measures to make the most of your money.

• Earn interest. Consider opening a high-yield savings account to save for your down payment as this gives you the ability to earn higher interest than a regular savings account.  However, make sure you choose an alternative that gives you easy access to your money. If you already have a lump sum amount that you plan to put toward your down payment, you may consider opening s short-term certificate of deposit.
• Lock your interest rate. When you’re looking for a suitable mortgage provider, determine which ones offer rate locks. This ensures there’ll be no change in the interest rate offered to you from the time of the offer to the closing. You may get a rate lock for 30, 45, or 60 days, depending on your lender. It’s important for you to ask your lender what might happen if interest rates drop during the rate lock period because not everyone follows the same practice.

 

Tips for Homeowners to Manage Rising Costs

Rising costs have affected home buyers and homeowners alike. If you own a home, you may work at reducing utility costs by following a few simple tips.

• Make sure there are no leaks in window frames for optimal regulation of indoor temperature.
• Use a smart thermostat.
• Clean and replace HVAC filters at regular intervals.
• During summers, draw the blinds when sunlight streams into the home directly.
• Switch to LED lighting and energy-efficient appliances.
• Maintain an emergency repair fund.
• Monitor usage of water (hot water in particular).

 

What Should Sellers Do?

Homeowners who wish to sell their homes at this point in time need to realize that instances of offers that exceed asking prices and bidding wars among prospective buyers are on the decrease. This is because a number of buyers are giving their plans second thoughts owing to existing interest rates and high price inflation. 

Now, it might be difficult to find buyers who are okay with relatively small problems. This is because buyer standards are getting back to what they used to be a couple of years back, and they might not want to overlook aspects such as worn-out carpets, poor paint jobs, and old fixtures. 

Bear in mind that simply relying on how well a particular market is doing might not translate into you getting the desired price for your house. As a result, you might want to give your home an aesthetic makeover to make it more appealing to prospective buyers. Given that the market still has an adequate number of buyers, consider making the required changes before listing your home.

 

Conclusion

While some markets across the U.S. have cooled down over the last few months and mortgage rates still remain on the higher side, the decision to buy a home is largely a personal one and depends on multiple factors. However, it’s crucial to know the differences between living on rent and owning a home from the cost perspective. For instance, once you’re a homeowner, you’ll need to account for property taxes, homeowners insurance, and the home’s regular upkeep.

If you feel buying a home now might work well for you, make sure you approach the process with due diligence. Start by narrowing down on a suitable mortgage provider and getting pre-approval. This gives you an indication of how much you can borrow and it also puts you in a better position at the negotiation table.

 

Disclaimer:

“Certain restrictions apply. For qualified borrowers. All borrowers subject to credit and underwriting approval. Rates, term, and loan program may be subject to change without notice. The payment on a $300,000, 30-year fixed rate loan at 5.50% and 75% loan-to-value (LTV) is $1,703.37. The Annual Percentage Rate (APR) is 5.692%. Payment does not include taxes and insurance premiums. If you add taxes and/or insurance to your mortgage payment then the actual payment will be greater. Some state and county maximum loan amount restrictions may apply. This is an example and is for illustrative purposes only.”

Much like you do not buy the first home that comes your way, it’s important to select a mortgage provider after comparing your top alternatives. An easy way to do this is to ask loan officers that represent the lenders you shortlist a few questions. It’s also crucial to share all the information that a loan officer seeks from you because this brings with it advice that’s apt for your situation. Here are the top questions to ask a mortgage lender or a loan officer.

 

1. What Types of Loans Do You Offer?

It’s common for most lenders to provide fixed-rate and adjustable-rate mortgages. However, the fixed-rate period for adjustable-rate mortgages (ARMs) might vary from one lender to the next. Further, you may find conventional mortgages with terms that vary from eight to 30 years, but not all lenders provide the same loan terms. Lastly, not all mortgage providers offer USDA loans, VA loans, FHA loans, and jumbo loans, making this one of the top questions to ask a lender.

 

2. How Much Can I Borrow?

One of the very good questions to ask a loan officer at the onset is how much you might be eligible to borrow. While online calculators help give you some indication, you are bound to get a clearer picture after discussing the specifics of your case with a loan officer. While loan officers take your income into account, they also pay attention to your debt-to-income ratio (DTI) and your ability to make repayments each month. Your DTI ratio essentially refers to how much of your monthly income goes toward rent and debt payments each month. 

Bear in mind that most lenders prefer DTI ratios lower than 36%, and no more than 28% of your income should go toward monthly mortgage or rent payments. You may also expect your loan officer to take into account any large auto or student loan that might have an effect on your capacity to repay a mortgage.

 

3. What Type of Mortgage Might Work Best for Me?

Given the wide array of mortgage types from which homebuyers get to choose, it’s important to find one that suits your requirements. While you might be new to this realm, a loan officer should have adequate experience and knowledge to be able to guide you in the right direction based not just on your financial profile, but other aspects as well. For example, if you wish to buy a home on the outskirts of a big city or in a small town, you might qualify for and benefit by getting a USDA loan.

 

4. Is My Credit Score Good Enough?

Not all types of mortgages come with the same credit score requirements, and you might qualify for some even with less-than-perfect credit. For example, while you typically need a credit score of 760 or higher to qualify for the lowest interest rates, you may qualify for a conventional mortgage with a score of 620 or higher.

 

5. Can I Get Pre-Qualified or Pre-Approved?

One of the questions to ask your mortgage loan officer surrounds whether you might be able to get pre-qualified or pre-approved. A pre-qualification is the simpler of the two and you might even receive one over the phone. Lenders provide pre-qualification based on the information you provide, and they don’t delve into your financial situation.

You may get pre-approval only after submitting a formal application for a mortgage. This is when a lender would take a close look at your employment details, income, and credit report.  A pre-qualification does not hold as much ground as a pre-approval because the latter comes with a conditional commitment from a lender that mentions the amount it is willing to lend.

 

6. Do I Qualify for Any Assistance Programs?

While there are a few down payment assistance programs that run at the national level and many at the state level, most are offered at the city or county levels. As a result, if you need assistance with making your down payment, it’s best to ask your loan officer about the programs that are available in your area.

 

7. How Much Down Payment Do I Need?

According to the 2022 Home Buyers and Sellers Generational Trends Report released by the National Association of REALTORS Research Group, the median down payment on a home is just 13%, and it stands at 8% to 10% for homebuyers between 23 to 41 years of age.  This is an important question to ask a mortgage officer if you have trouble coming up with a large down payment because your loan officer might be able to offer suitable alternatives. For instance, USDA and VA loans come with no down payment requirements. Besides, you might be able to get a conventional mortgage by providing less than 20% as down payment.

8. How Much Will I Need to Pay for Private Mortgage Insurance?

You’ll typically need to pay for private mortgage insurance (PMI) if your down payment towards a conventional loan is less than 20%, in which case this is among the top questions for loan officers.  PMI costs may vary from 0.5% to 2% of the original loan amount. It varies based on factors such as your credit score, the down payment amount, and the loan term.  While most major PMI providers in the U.S. charge largely similar rates, the answer to this question can give you an indication of the added burden you might face.

 

9. What Might Happen if the Appraisal Amount is Low?

Lenders rely on the appraised value of a home to calculate the loan-to-value ratio and not its purchase price. If the amount that comes through after the appraisal is lower than a home’s asking price, there’s a good chance that your lender will reduce the amount it is willing to lend. Consequently, you might have to ask the seller to lower the price or make a larger-than-expected down payment. If you’ve already made an offer and paid an earnest amount, you may stand to lose the same if you back out of the deal, unless you’ve included an appraisal contingency clause in the offer.

 

10. Are You Internet-Friendly?

You need to ask this question to a loan officer if you prefer handling your finances online. Given the advancements in technology, it’s fairly easy to find a lender that lets you apply for a mortgage and submit all the required documentation online. In addition, some lenders also give you the ability to make online payments.

 

11. Will my Mortgage Get Sold Off?

Even if you take a mortgage through a direct lender, there’s a possibility that the lender might finalize your loan and then sell it to a loan servicing company. While this is typically not a problem for borrowers, it’s good to know this information ahead of time. What you’re basically looking for by asking this question is an honest answer.

 

12. Does the Approval Process Take Place In-House?

If you apply for a mortgage through a mortgage broker or an online-only company, you may expect a different entity to handle the underwriting process. However, when you work with a direct lender, there’s a good chance that the processing takes place in-house. This makes it to the list of good questions for loan officers because in-house processing usually results in quicker approval times. Besides, lenders that carry out in-house underwriting may offer flexible eligibility criteria for borrowers who have complex files.

 

13. How Will I Receive Updates?

The process of getting a mortgage may take a month or two, or even longer. During this period, your loan officer might need to contact you to seek more information or provide updates about your application. As a result, it’s good to determine if your loan officer is in line with your preferred mode of communication.  For instance, while some borrowers prefer over-the-phone updates, others are more comfortable corresponding through text messages or emails. In addition, you might also benefit by asking how often you may expect updates.

 

14. What Does My Loan Estimate Look Like?

While interest rates change regularly, your loan officer should be able to give you some indication of the interest rate you may qualify for, even during the pre-qualification stage.  Once you begin the application process, you get a better idea through your loan estimate. This document mentions the annual percentage rate (APR) that will apply to your mortgage. The APR accounts for the interest rate as well as all other loan-related costs. The loan estimate also gives you a detailed breakup of all the fees and charges you’ll need to pay, including those that are part of closing costs.

If there is any change in costs, a lender is required to send you a revised loan estimate. If there’s any cost that you don’t understand, it’s best to ask your loan officer about it in advance. Using loan estimates is a good way to compare the costs of different types of mortgages, and you may also use them to evaluate multiple lenders.

 

15. Do You Offer Discount Points?

Discount points help bring down your mortgage’s interest rate in exchange for a fee. Besides, they might be tax deductible. If your lender provides discount points and you can afford to pay for them in addition to your down payment, this step can lead to long-term savings through a lower interest rate. This is particularly the case if you plan to keep the loan for a long period.

 

16. Do You Charge Prepayment Penalties?

This is an important mortgage question to ask if you plan to pay off your loan ahead of time because several lenders charge prepayment penalties when borrowers pay off their loans earlier than scheduled.  Typically, mortgage providers let borrowers pay up to 20% of their balance amounts each year before applying this penalty. A prepayment penalty might also apply if you’re refinancing your mortgage, selling your home or paying off a substantial portion of the loan.

 

17. Will I Need to Maintain an Escrow Account?

Your lender might set up an escrow account upon the closing of your mortgage, to which it directs part of your monthly payments with the aim of covering different costs. These may include mortgage insurance premiums, homeowners’ insurance premiums, and real estate taxes. Lenders do this to ensure that you make all required payments associated with homeownership on time, and to minimize the risk they face, should you default on your loan. If your lender requires an escrow account, find out if you have options to pay for shortages and the process of getting refunds in case of overpayments.

18. Can I Lock the Interest Rate?

This is an important question to ask a loan officer if you’re worried about the interest rate increasing from the time you apply for a mortgage until it closes. There is a good chance that a lender might give you a rate lock option upon the approval of your initial application and before the underwriting process begins. Rate lock periods tend to vary from 30 to 60 days, although this is not always the case.

A rate lock basically protects you from a rise in interest rates. One that comes with a float-down option lets you benefit through any interest rate decrease that might take place during the rate lock period. Rate lock fees may vary from one lender to the next.

 

Conclusion

Now that you know what questions to ask a loan officer, make sure you exercise due diligence in choosing the right lender. For instance, while paying attention to the cost of a mortgage is crucial, it’s also important that you take flexibility in terms and a lender’s customer service into account before making a decision.

Bear in mind that there’s no real point in looking at homes to buy before you get a pre-approval because only then do you actually find out how much money a mortgage provider is willing to lend. Knowing the common mistakes to avoid when buying a home will also hold you in good stead.

Just like every rose has its thorn, self-employment comes with its share of potential drawbacks. This becomes particularly obvious when you set out to get a mortgage for buying a home. Fortunately, while getting a mortgage as a self-employed individual can be more difficult than qualifying for one if you have a regular job, you may still think about becoming a homeowner if you meet some requirements and follow a few measures.

 

Are You Self-Employed?

From a lender’s perspective, you may qualify as a self-employed borrower if you have at least 25% ownership in a business, be it a corporation, a sole proprietorship, or a partnership.  Independent service providers and contractors fall under the self-employed bracket. You’ll also qualify as a self-employed borrower if you work for a business as a gig worker and receive Form 1099-MISC instead of Form W-2. 

A lender might also view you as self-employed if a major portion of your income comes from:

• Royalties
• Rent payments
• Interest/dividends

 

Mortgages for Self-Employed Borrowers 

If you earn any income that comes with a Form 1099, you can be sure that a lender will view it as self-employment income. In this case, you’ll need to get through a few roadblocks before you may qualify for a mortgage. People who don’t plan to include their self-employment income in their mortgage applications need to realize that lenders will still look at their tax returns to determine how much money they make or lose. Further, if you plan to write off business losses against income, you run the risk of an underwriter subtracting the losses from your otherwise-qualifying income.

Just how much scrutiny your application receives depends on the mortgage provider you select, your income, as well as the type of business you run. Since there is no formal contract of employment to fall back on, lenders typically ask for proof of income to determine if a borrower can afford to make monthly payments. Asking for additional proof to ensure that there is stability in income is common, as is determining if you have adequate cash flow to deal with low-earning periods.

The Two-Year Requirement

Even before looking at your income, most lenders will want to determine if you’ve been self-employed for a minimum of two years.  According to Freddie Mac, sellers might be able to justify providing mortgages to borrowers with at least 12-month self-employment work histories, provided they meet certain criteria.  For instance, you may qualify if you’ve been self-employed for 12 months and held a job in the same field for at least two years prior to the switch.

Do You Receive W-2s?

If you receive W-2s, documenting your income for a mortgage application is fairly easy. All you need to do is provide copies of your W-2s for the preceding two years along with your last two pay stubs. You don’t need to provide tax returns unless you have considerable tax-deductible employee expenses or you earn a tidy sum as income from investments or commissions. 

Self-employed borrowers with W-2s may also submit copies of their bank, retirement, and investment account statements. In this case, there is an increased possibility of approval if an underwriter finds your income to be adequate and your credit score to be satisfactory.  

Self-employed individuals who don’t receive W-2s have to follow a more difficult path. While they need to provide copies of their personal accounts, they typically also need to submit their personal tax returns, business account statements, business tax returns, profit and loss statements, as well as year-to-date balance sheets. 

Self-Employed Mortgage Documents

You may expect a lender to look at your income stability and the nature of your self-employment before making a decision. Applying for a mortgage as a self-employed individual requires that you provide different types of documentation. It may include:

• Bank statements
• Personal and business tax returns (including schedules K-1, 1120, and 1120S) 
• Profit and loss statements
• Balance sheet
• Relevant state or business license

 

Are Self-Employed Mortgage Borrowers at a Loss?

Most mortgage providers don’t look at self-employed borrowers as ideal candidates. The reason they look at regular employees with favor is because of their steady and easily verifiable incomes. When compared to self-employed borrowers, regular employees with W-2s need to go through considerably lesser paperwork when applying for mortgages. 

One distinct challenge in applying for a mortgage as a self-employed individual is you’ll need to address business expenses. From the taxation point of view, deducting these costs can help bring down your taxable income. However, when you apply for a mortgage, a lower annual income might lead a lender to wonder if you earn enough money to purchase a home. In addition, lenders commonly seek low loan-to-value (LTV) ratios from self-employed individuals. This usually translates to making a larger-than-usual down payment.

 

Improving the Odds of Approval

Most lenders look at self-employed mortgage borrowers as high-risk propositions. This is mainly because of the preconceived notion that self-employed individuals can come with highly unpredictable income patterns. While people from this bracket find it harder than regular employees to get mortgages, following a few measures may help improve the odds of a successful application.

Scrutinize Your Finances

Take a close look at your personal and business finances to determine your existing financial situation even before you start looking for a mortgage. Ideally, you should keep your individual and business accounts separate. This is because lenders can have a tough time distinguishing between the two if there’s any kind of overlap. 

No matter whether you’ve filed your personal and business income separately or together, it’s crucial that you document all the sources of your income to build a stronger application for the underwriter. Bear in mind that while a lender would want to look at your personal finances, it would also want to determine how well your business is doing. 

Here are some questions that can help you establish where you stand:

• How much do you currently owe toward personal and business debt?
• Do you make enough money through your business to cover your mortgage and other payments?
• How much can you afford to pay toward monthly mortgage payments?
• How much can you afford to pay to cover closing costs and as down payment?
• Do the preceding two years as a self-employed individual show steady or an increase in income?

Look at Your Credit Score

Your credit score plays a crucial role in whether or not you qualify for a mortgage and the terms that a lender offers. For instance, this factor has a significant effect on self-employed mortgage rates.

Lenders typically request your credit reports from all three credit bureaus, along with corresponding FICO Scores. This helps them evaluate the risk you pose as a borrower. Ranging from 300 to 850, the higher your credit score, the better the chances of approval. Besides, lenders tend to offer the lowest interest rates to applicants with exceptional credit scores.

It’s important that you look at your credit score before a lender does. This way, if you have less-than-perfect credit, you may work on improving it before applying for a mortgage. This step also helps you identify any possible errors in your credit reports that might cause your credit score to drop. If this is the case, you may contact the credit bureau in question to get the error fixed.

Inspect Your Debt-to-Income Ratio

Debt-to-income (DTI) ratio refers to the percentage of your gross monthly income that’s required to make your monthly debt repayments. For example, if your gross monthly income is $5,000 and your combined monthly debt payments amount to $2,000, your DTI ratio is 40%. Lenders pay close attention to the DTI ratios of self-employed mortgage seekers, and they view applicants with high DTI ratios as high-risk borrowers.

According to Fannie Mae, the maximum allowed DTI ratio for a manually underwritten mortgage is 26%. It can go up to 45% if a borrower fulfills credit score and other specific requirements. In addition, there can be exceptions in some cases such as cash-out refinance and high LTV refinance transactions. If your DTI exceeds 45%, consider bringing it down before you apply for a mortgage.

Offer to Make a Large Down Payment

Lenders view borrowers who start by having higher-than-usual equity in their homes as less likely to default on their mortgages. As a result, offer to make as large a down payment as possible without stretching your resources.

Have Substantial Cash Reserves

If you’ve saved a substantial amount of money, it shows lenders you can continue making monthly payments even if you suffer a temporary financial setback.  Ideally, you should be able to show enough cash reserves to cover 12 to 24 months of mortgage payments, insurance payments, property taxes, and the home’s regular upkeep.

Paying off as much of your consumer debt as possible before you apply for a mortgage is ideal. While this helps bring down your DTI ratio by reducing your monthly payments, the additional cash flow you have access to might also result in a lender offering you a higher loan amount.

Select a Suitable Lender

Not all mortgage providers view self-employed applicants in the same manner. For example, most big banks follow stringent eligibility criteria that might not work well for self-employed individuals. Specialized mortgage lenders, on the other hand, tend to offer self-employed people with good credit scores and adequate income a better opportunity to qualify for a mortgage.

 

Self-Employed Mortgage Loan Alternatives

Much like homebuyers who have regular jobs, self-employed mortgage seekers also get multiple options from which to choose. These include conventional mortgages as well as alternatives to traditional mortgages.

Conventional Loans

A majority of the mortgages issued in the U.S. classify as conventional conforming loans, guidelines for which are set by Freddie Mac and Fannie Mae. Lenders that provide conforming loans require self-employed applicants to show at least two years of self-employed work history. You typically need a credit score of over 620 to qualify for a conventional loan. You’ll also need to DTI ratio of 43% or lower.

USDA Loans

Backed by the U.S. Department of Agriculture, USDA loans are made available for the purchase of rural property as well as homes in suburban areas of large cities. These loans come with no down payment requirements, although you need to show at least two years of self-employed work history. To qualify, you need a credit score of 640 or higher. In addition, your monthly mortgage payment, including taxes and insurance, should not exceed 29% of your monthly income.

VA Loans

The U.S. Department of Veteran Affairs backs VA loans. While you may apply as a military veteran, you can also apply if you’re still in military service, a surviving spouse, or a reservist. As a veteran, you don’t have to make any down payment. There is no prescribed minimum credit score requirement, which is why it may vary from one lender to the next.

Non-Qualified Mortgages

Non-qualified mortgages (non-QMs) are ones that you may qualify for by providing alternative forms of documentation. Lenders who provide non-QMs tend to follow more relaxed credit requirements than those who offer conventional mortgages. Besides, you may even qualify with a DTI that’s over 43%. Meadowbrook Financial provides non-QMs for people with fair/average credit, for those looking at larger-than-usual loan amounts, for investors, as well as for foreign nationals. 

 

Conclusion

Self-employed people who have good creditworthiness and earn enough money may think about getting mortgages to go the homeownership way.  While the going might not be as easy as it is for people with regular jobs, you still get different options from which to choose. What’s important is for you to look at your existing financial situation and your ability to make payments going forward.

If you’re wondering how to calculate income for self-employed borrowers or need help to determine which mortgage option might work best for you, consider speaking with a loan officer who works with a reputed mortgage provider.

A significant number of Americans became first-time homeowners during the last couple of years because of historically low mortgage rates. High demand coupled with relatively low supply led to a fairly competitive market. According to RedFin, 53.6% of homes ended up selling for more than their list prices in May 2021, a sharp increase from 26% during the same month in the preceding year. However, with interest rates on the rise, many are starting to wonder if buying a home in 2022 is a good idea.

 

The Interest Rate Scenario

No matter which way you look at it, it’s plain to see that the Federal Reserve aims to do its best to get inflation under control. There will be some collateral economic damage appears to be a given. The spike in mortgage rates over the last few months is unprecedented. In the week ending on December 22, 2021, the average interest rate of a 30-year fixed-rate mortgage stood at 3.05%. It climbed to 5.30% in the week ending on May 11, 2022, and dropped marginally in the following few weeks. One is yet to see the overall effect of this rapid increase on the housing market. 

From the policymakers’ point of view, a slowdown in the housing sector might result in a slowing down of inflation. Rising interest rates seem to have had the desired effect in cooling down one of inflation’s most important drivers. For instance, data released by Mortgage Bankers Association shows that mortgage applications for purchasing new homes decreased by 14% from March 2022 to April 2022. Further, data released by Zillow indicates that there is a positive change in inventory levels from March to April. For those wondering if housing prices will drop in 2022, know that they continue to increase gradually at this point in time, and there’s no near reversal in sight.

 

Will the Housing Market Crash in 2022?

If you’re wondering when the housing market will crash again, the simple answer is – not any time soon. In fact, most experts actually have favorable forecasts surrounding the U.S. housing market for the remainder of 2022. This is because while there has been a relative slowdown in hyperactivity over the last few months, the market continues to witness fairly strong demand as well as an increase in prices. 

Urgency among prospective homebuyers driven by expectations of further increases in interest rates might help the summer market remain upbeat, and sellers who wish to capitalize on the equity they’ve built over the years may also help the cause.

The market might become more favorable for buyers in the coming months as more inventory hits the market. Besides, the market could also experience an uptick in the number of first-time buyers on their way to homeownership.

 

The Millennial and Gen Z Effect

Data released by Statista shows that millennials(born between 1981 and 1996) accounted for the largest share in the U.S. population chart in 2020, at 21.93%. Although at the third spot, Gen Z (born between 1997 and 2012) was not far behind, at 20.35%. Together, both represent over 40% of the country’s population, which is significant because first-time homebuyers account for the largest segment of people buying homes. It is safe to assume the deep buyer pool that exists will keep demand strong, all the more so because inventory remains low.

A handful of experts making housing market predictions for the next five years agree that a market crash is in the making, although the likelihood of this happening remains extremely slim. This is because there has been no significant increase in inventory over the last decade, and many from Gen Z will soon be ready to go the homeownership way. Further, while demand will remain high in the coming years, inventory is set to remain lower than the demand.

Not surprisingly, the low supply is working as a catalyst in fuelling demand and increasing home prices, which also indicates that the housing market is bound to remain strong. Given that not enough houses have been built over the last 10 years or so, one can expect that it will take several years to add the required inventory to balance the market.

In balanced housing markets, the time it would take to sell all existing inventory at the current pace stands at around four to six months. In April 2022, this number stood at 2.2, highlighting that the market is in favor of buyers. 

Privately-owned housing starts in April 2022 stood at 1,819,000, up by 14.6% from April 2021. However, even this seemingly large number will do little to bring down home prices in the near future. 

 

Are There Any Warning Signs?

“When will the housing market crash again?” is a question that’s commonly doing rounds for well over a year now.  While many experts feel that the economy is on its way to recovery, others feel that a recession is in the making. This is not without reason, because inflation began to climb in 2021, as did consumer prices.

To deal with the situation, the Federal Reserveincreased the funds rate in May, accounting for the biggest hike in over two decades. Some viewed this as a sign that a slowdown is just around the corner.  While the funds rate doesn’t have a direct bearing on long-term mortgage rates, it impacts short-term rates that come with adjustable-rate mortgages, personal loans, and credit cards. Therefore, an increase in rates can lead to a slowdown in spending.

In its forecasts for 2022, Goldman Sachs predicted that the country’s GDP would increase by just 1.75%. In addition, an April 2022 publication suggests that there is a 15% chance the country might go into recession within the next 12 months, and a 35% chance that it will happen in the next 24 months. If this happens, it will definitely not augment well for the housing market. 

 

The Russia-Ukraine War

Energy prices were already increasing, and the U.S. and Eurozone ban on Russian oil has amplified the pressure further still. High energy prices do not bode well with rising inflation. With increasing interest rates thrown into the mix, there could be reasons for consumers to cut overall spending. This could also mean that some people might lose their drive to become homeowners, or at least put their plans on the backburner for a while.

According to the University of Michigan, the index of consumer sentiment stood at 50.2 in June 2022, down from 85.5 in June 2021, a -41.3% year-on-year change, and also its lowest recorded value.  Respondents in the survey highlighted there was anxiety about the effect that the Russia-Ukraine war might have on the American economy, as well as about rising oil prices and high levels of inflation.

America’s ban on Russian oil imports can lead to supply chain problems, which, in turn, may have a dampening effect on already high inflation. Besides, this geopolitical conflict now appears to persist for way longer than originally expected. If the prices of goods increase, there could be a possibility of consumers being uncomfortable when making large purchases – such as buying homes.  

 

What Should You Do?

Some people are on the fence when it comes to buying a home in 2022, wondering if they should put their plans on hold and wait for prices to drop. However, the possibility of this happening any time in the near future is rather bleak. The existing demand to buy homes and inadequate inventory are bound to keep prices on their upward trend. Besides, Wall Street firms continue to want to add real estate to their portfolios. Consequently, prospective first-time homebuyers are not just competing with each other, but with investors as well. 

On the whole, while some sectors such as the stock market and oil are experiencing volatility, the upward trend in housing prices will continue because of the supply and demand rule.

 

Are You Financially Sound?

Prospective homebuyers should ideally look at their existing financial situation and determine if the numbers work in their favor. If you plan to buy a new home and live in it for several years, and if you have a stable job that will let you keep up with your mortgage payments, you may consider buying a home in 2022. Given that mortgage rates might increase even more, there is no reason to postpone buying a home if you can afford to at this point in time.  If you feel you’re in a financially secure position, you may well start looking at homes that fit your bill.

 

Timing the Market

Timing when you purchase a home based on market conditions is easier said than done, and even experts go wrong in their predictions at times. Halfway through 2022, you need to realize that while mortgage rates are on the rise, they’re still affordable.  Consider this for perspective – the average interest rate for a 30-year fixed-rate mortgage stood at over 18% in October 1981. It dropped to below 6% only toward the end of 2002. In July 2008, it breached the 6.5% mark again. 

Anyone expecting to time the market perfectly might be in for disappointment. If you find a home that meets your requirements and is within your budget, signing the dotted line might work well for you. Bear in mind that waiting for longer will result in spending more on rent and you might also be burdened with a higher interest rate than you may get now.

 

What Can Cause Prices to Drop?

A continued increase in interest rates along with poorly performing financial markets might cause the rise in home prices to slow down or reverse. For instance, if mortgage rates climb to 5.5% to 6% and there’s a pullback of 20% or more in the financial markets, these factors could cause a lull in the appreciation of home prices. In addition, if prospective buyers have reduced purchasing power, the demand for homes might drop. 

A long-drawn war in Europe might have a cascading negative effect on home prices in the U.S., as might the after-effects of the pandemic. For instance, many baby boomers with significant equity in their homes chose not to sell over the last two years. If there’s a change in this trend and they start downsizing their homes, the market might get some added inventory, which, in turn, might lead to price corrections. 

You may expect home prices to reduce significantly in the near future only in case of an event of large proportions, such as a war, a sudden drop in demand, or a rapid addition of inventory. Even if home prices don’t continue to rise at the same rate, existing data suggests that prices are unlikely to nose-dive in the near future. 

The large rate of defaults that took place during the 2008 financial crisis is unlikely to happen again because lenders are way more prudent when issuing mortgages now. Unless history repeats itself in this form or in the form of double-digit interest rates, it looks like existing housing market trends are here to stay.

 

Conclusion

Don’t let the fear of missing out (FOMO) drive you into purchasing a home that holds the potential to put your finances in disarray. That said, 2022 is definitely a good time to buy a home because the demand continues to overshadow the inventory, and because prices might not rise as quickly and as much as they did in 2021. Prospective buyers also need to understand that there are micro-markets within markets, and some of the submarkets might present more favorable deals than others. 

Bear in mind that no one can conclusively say when the housing market might crash again. Besides, most experts are of the opinion that while 2023 might witness some slowing down, a crash is highly unlikely.  If you’re still wondering whether 2022 is a good year to buy a home, know that it essentially depends on how ready you are to take the plunge. If you decide to move forward, start by looking at what different types of traditional and alternative mortgages have to offer.