The housing market is changing rapidly. Sales are falling as mortgage rates rise, but the lack of inventory is pushing up home prices, which means a tougher time for buyers, but more equity for homeowners.
Here are tips to help navigate today’s lending environment.
1. Improve your credit score and your mortgage rate.
Almost one in three homebuyers will be rejected for a mortgage because of their credit score, according to a report by the Urban Institute’s Housing Finance Policy Center, or HFPC. The findings take into account the applicants’ credit scores, combining publicly available data and CoreLogic data to estimate the denial rate.
Although lenders consider more than just an applicant’s credit score, that is a big component, says Shayn Carlson, mortgage originator for Fairway Independent Mortgage Corporation in Boise, Idaho.
“As a 30,000-foot view there are four major pillars lenders have to focus on: that’s income, assets, credit and collateral,” says Carlson. “But, good credit makes it so much easier to get a loan. It’s a great compensating factor.”
Before you shop around for the best mortgage rate, check your credit score. The better your score, the lower your rate will be.
“When you’re working with people with bankruptcies, student loans that never get paid and charge-offs, it becomes a tangled web. It’s worth it to take the time to reestablish your credit and let it heal,” says Carlson.
2. Tap into your equity while rates are low
As home values climb so does equity–that’s the value of the house, less your mortgage. The collective amount of equity available to today’s homeowners is $5.8 trillion, according to Black Knight, a mortgage software and analytics company.
The advantage of borrowing against your home’s equity is that it’s usually cheaper than taking out an unsecured loan, especially in today’s relatively low mortgage-rate environment. Two ways homeowners can finance these equity loans is through a home equity line of credit, or HELOC, and a second mortgage. Both products are similar in that they’re available with fixed and adjustable rate options and they both are secured by the equity in your home.
What makes these two products different is how they’re dispensed and the monthly payments. Borrowers who get second mortgages receive a lump sum of cash whereas HELOC borrowers are extended a line of credit. HELOC borrowers can use what they need and are only obligated to pay back that amount.
The HELOC minimum payment varies depending on the balance, whereas with a second mortgage the payment remains the same.
Consumers who want to make home improvements usually go for HELOCs, says Jon Maroni, business development officer at Spokane Federal Credit Union.
“HELOCs are great for people who don’t know how much cash they’ll need. With something like home improvements, people aren’t sure how much the total cost will be. So, in that case, a HELOC would be useful because they can draw money as needed,” says Maroni.
Conversely, second mortgages might be a good option for those who want to consolidate debt. Because there’s a known total amount, borrowers can pay off the old debt without running the risk of overborrowing.
3. Don’t miss out on state-sponsored down-payment assistance programs
Down payments can be barriers to home ownership for many consumers. Even a small down payment might be unaffordable for people who are otherwise able to make monthly mortgage payments. This can be frustrating to prospective buyers who want to lock in rates before they continue to rise.
According to a survey conducted by the HFPC last year 53 percent of renters cited saving for a down payment as an obstacle to homeownership.
“There are down-payment assistance where people can buy a home using state programs,” says Kristina Hernandez, branch manager for Stearns Home Loans in Stockton, California. “The minimum credit score for some of these programs is 640, so it’s not like they have to have excellent credit to qualify. It’s within reach.”
Hernandez cites California’s home loan program, called CalHFA, as a valuable resource.
“There are renters who pay between $1,500 and $3,000 for rent. They can easily make a mortgage payment, they just might not have enough saved for a down payment. We want to help these people,” says Hernandez.
Some buyers think they need to have 20 percent of the cost of the house, which isn’t necessarily true. In fact, the national median loan-to-value (LTV) ratio is 93 percent, according to the HFPC survey.
Research the programs available in your area. This information, including what you’ll need to qualify, is likely available online. You should also talk to your lender about state- or county-sponsored programs. You might find that clearing the down-payment hurdle is easier than you think.