Small steps can be the difference between renting and signing the contract on your new home in 2015.
It seems homeownership is still a critical component of the American Dream. According to a Trulia survey, even in 2011 — when the market was volatile and uncertain — 65 percent of young adult consumers said they still considered owning a home a part of their life goals. In a more recent study, that number rose to 78 percent.
And yet, while it remains important for the vast majority of Americans to own a home, there are some major obstacles. According to the survey, renters looking to buy a home in the near future cited the following barriers:
- Saving enough for a down payment
- Having a poor credit history
- Qualifying for a mortgage
- Rising home prices
- Unable to pay off existing debt
- Not having a stable job
- Rising mortgage rates
- Limited inventory
So how can prospective homebuyers overcome these obstacles?
Save — and then save some more
The majority of homeownership obstacles stem from one source: money. Cash is king and this is never more true than in real estate. Having a hefty down payment in your pocket when home shopping means wielding considerable power — winning the contract in a bidding war, qualifying for a mortgage, and securing a better rate on your loan. Sounds like a no-brainer, but we all know that saving money for a down payment is much easier said than done.
“I found that saving money each month toward a specific goal became much more doable when I had systems in place,” says Natalie Streeter, who recently plunked down a hefty down payment on a home in the suburbs of Pittsburgh. Natalie credits setting up an automated direct deposit of funds into an earmarked savings account for her ability to accumulate the down payment over the course of a year.
While a 20 percent down payment is ideal, it may also be worth checking into an FHA loan program that requires only 3.5 percent of the purchase price as a down payment. The guidelines are ever changing, so be sure to consult with an experienced loan officer to see if you qualify.
Clean up your credit
That credit card you signed up for on a whim and missed some payments on in in your 20s may make all the difference in qualifying for a mortgage in your 30s. The first and most critical step in dealing with your credit woes is to be informed. Pull your credit report through one of the three major reporting bureaus: Experian, Equifax, and TransUnion. Work directly with them to clear up any administrative errors such as incorrect past addresses or misappropriated accounts. Then move on to any bigger issues that may affect your total financial picture.
Worth noting: Not all credit issues carry the same weight in terms of affecting your ability to qualify for a loan. Delinquent or missed mortgage payments, foreclosures, and bankruptcy are three of the most critical marks on your report. Also, if your accounts have been sent to collections for utilities, credit cards, or other consumer debt, these issues will need to be remedied as well.
Credit scores and reporting are comprehensive and confusing; rather than tackling the project on your own, seek advice from your loan officer. They will advise on which items are most impactful for loan qualification purposes. Seek counsel early and begin the credit cleanup process while you’re working on saving your down payment.
Consider working with a mortgage broker
Qualifying for a mortgage is no walk in the park. Especially if you’re not the traditional borrower. Self-employment, gaps in work history, or negative marks on your credit report could mean a denied loan application.
Additionally, most big commercial banks offer just a handful of loan programs for specific borrowers. If you’re not meeting their cookie cutter criteria, you may find more success with a mortgage broker. Unlike a loan officer working in a bank, mortgage brokers have access to dozens of loan programs spanning multiple banks.
“We are often able to help solid borrowers that were turned down elsewhere because we have access to a wide variety of loan programs that traditional banks simply can’t offer,” says Louis Pugliese of AJG Financial in Phoenix.
Pugliese says it’s not uncommon for brokers to be able to source up to 70 programs at a time, versus the three or four offered at major commercial banks. Their ability to offer many programs based on a wide variety of criteria could be your key to homeownership.
If you’re renting and would like to own a home in the future, take time to speak with an experienced loan professional and real estate agent. Understanding your options and implementing small steps now can make the difference between renting for another two years and signing the contract on your new home in 2015.