5 Essential Financial Steps For First-Time Home Buyers

For first-time home buyers, there’s a lot that needs to be done before they start touring listings and submitting offers. It is important to keep on track so that the path to closing is smooth. Here are a few items to keep in mind to make sure the finances are in order.

1. Determine Total Monthly Housing Budget. 

What can you really afford? The total should include estimated taxes, HOA dues, if any and home insurance costs. After all, in some places, that can double your mortgage payment. Buyers should be encouraged to talk to an insurance agent to get an estimate of the costs in the areas in which they’re looking to buy. Mortgage financing giant Fannie Mae recommends home buyers spend no more than 28 percent of their income on housing. Buyers may start to struggle financially when housing costs take 30 percent or more of their income, financial experts warn.

2. Factor In The Closing Costs. 

Buyers shouldn’t be blindsided by the cost of a transaction. Be sure to understand everything from origination fees, title and settlement fees, taxes, and prepaid items (such as homeowners insurance or homeowners association fees). More precise numbers will be available from the lender as you get through the application process and.

3. Examine Creditworthiness. 

Will you even be able to qualify for a loan? Buyers should get a free annual credit report and look for any errors or unresolved issues. They should contact the credit reporting bureau immediately if they spot any errors. They also might want to determine their FICO credit score, which many lenders use to help determine an interest rate for financing.

4. Prepare Documents. 

Buyers will need to be ready to show a lot of documents when applying for a home loan. These include pay stubs, bank account statements, W-2’s, tax returns for the past two years, statements from current loan and credit lines and names and addresses of landlords for the past two years. Gathering these together ahead of time will help make the process smoother and faster.

5. Get Pre-approved. 

This not only helps buyers get a better understanding of what they can truly afford, but it also puts them in a better position to submit an offer when they find a home they love. Also, financial planners say applying to multiple lenders in the same month may help boost a buyer’s chances of getting a loan approved at the best rate possible without dinging their credit score too much.

Source: “11 Must-do’s for the First-Time Homebuyer,” Las Vegas Review-Journal (Aug. 7, 2017)

2017’s Best Big Cities To Live In

Homes Underwater Are Drying Up

With rising home prices comes fewer homeowners who are underwater, or owing more on their mortgage than their home is currently worth. In the first quarter of 2017, 350,000 borrowers regained equity, which dropped the total number of underwater owners to 1.8 million, according to the latest Mortgage Monitor Report from Black Knight Financial Services, a real estate data firm.

The number of underwater homeowners has dropped by nearly 1 million borrowers since last year. This marks the first time the underwater population has dropped below 2 million since 2006.

“The steady upward trajectory of home prices continues to improve the equity positions of many homeowners,” says Ben Graboske, Black Knight Data & Analytics executive vice president. “This is plainly visible in the number of borrowers who are underwater on their mortgages. … Over the past year, we’ve seen a 35 percent decline in the total underwater population, with a 16 percent decline in that population over the first three months of 2017 alone.”

Negative equity has become more concentrated among a particular class of homeowner, Graboske notes. Nearly half of the remaining underwater borrowers live in the lowest 20 percent of homes in their markets.

“While the nation as a whole now has a negative equity rate of just 3.6 percent, among owners in that lowest price tier, it’s over 8 percent,” Graboske says. “In fact, these lowest-price-tier properties are more than twice as likely to be underwater as those in the next price tier up, and 6.5 times more likely to be underwater than those living in the top 20 percent of the market. This is the highest differential we’ve seen between high and low price tiers since we began tracking in 2005.”

Overall, fewer underwater homeowners in the U.S. has made the number of owners with equity zoom to record highs. More than 40 million Americans have “tappable equity” available in their homes, the largest population on record, according to Black Knight. Tappable equity is considered to be borrowers with at least 20 percent of equity in their homes.

“This is the largest this population has ever been,” Graboske says. “If home prices continue to rise at or near their current rate of appreciation, tappable equity will likely hit record highs by this summer.”

Graboske notes that more than half of the nation’s tappable equity is centered in the 10 largest metro areas. California, for example, contains nearly 40 percent of available equity.

“While the growth in tappable equity is obviously good news for both homeowners and lenders alike, it does represent some risk as well,” Graboske notes. “Investors in mortgages and mortgage servicing rights—as well as others with a stake in the broader mortgage market—need to be prepared to account for a higher share of equity-driven prepayment risk, as well as an increased chance of borrowers adding on second liens that primary loan servicers and investors may not be aware of.”

Source: “Monthly Mortgage Monitor/May 2017,” Black Knight Financial Services (July 2017)

2017’s Safest States In America

Bill Aimed At Ending “FICO Monopoly” At Fannie Mae And Freddie Mac Reintroduces

Three senators are restarting a legislation to allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use.

This week Reps. Ed Royce, R-Calif., Kyrsten Sinema, D-Az., and Terri Sewell, D-Al., introduced H.R. 898, the Credit Score Competition Act, which enables the GSEs to consider alternative credit scoring models when making mortgage purchasing decisions.
Royce and Sewell first introduced in December 2015, but since Sewell is now seated on the House Ways and Means Committee, Sinema became the lead Democrat on the bill.

“I am proud to help reintroduce this critically important legislation as Fannie Mae and Freddie Mac continue to rely on credit score models that are outdated and don’t necessarily take into account something as simple as whether borrowers have paid their rent on time,” added Sewell. “This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the country.”

Plus, the fight to introduce alternative credit scoring models at the GSEs goes even further back. Freddie Mac CEO Donald Layton told HousingWire back in November 2014 that it was looking to add other credit score providers, saying they were studying one or two alternatives to FICO.

“Alternative credit score consideration by the GSEs is a win-win: it opens up the market in a responsible manner for those qualified to buy a home and eliminates the government-backed monopoly in credit scoring. That’s why the Credit Score Competition Act has garnered such strong bipartisan support,” said Royce.

As it stands, Fannie Mae and Freddie Mac exclusively rely on a single credit scoring model to make mortgage purchasing decisions, and when this is merged with the GSEs’ dominance of the secondary mortgage market, it has resulted in a government-backed monopoly in credit scoring, the joint press release stated.

The new act, instead, directs the Federal Housing Finance Agency to create a way to open up the GSEs to alternative empirically derived and statistically sound credit scoring models

“Many creditworthy and financially responsible Arizonans don’t qualify for government-backed mortgages because of an outdated and flawed credit-scoring system,” said Sinema. “Fannie Mae and Freddie Mac should have the ability to look beyond traditional forms of credit and take into account factors including whether or not borrowers pay their rent on time. Our bipartisan solution helps more hardworking Arizona families achieve the American Dream.”

If passed, the act would open the door for other credit score companies like VantageScore Solutions. “Markets work most efficiently when there’s competition and the status quo is effectively a government sanction monopoly,” said Barrett Burns, president and CEO of VantageScore Solutions.

“We are supportive of all of the efforts to bring much needed competition among credit score model developers into the mortgage origination space,” said Burns. “From the beginning, our ask has always been to allow lenders to choose among today’s more predictive models that score more creditworthy consumers without lowering credit standards.”

Type Of Millennial Mostly Likely To Live With Parents

Young adults aged 18 to 34 are more likely to live with a parent than in any other arrangement for the first time since 1880, the Pew Research Center recently reported. But researchers have found a somewhat surprising segment of the millennial population more likely to be staying in their parent's basement. Pew reports it's mostly older, male millennials without a college degree who are making for the record numbers.

While the youngest of today's adults are still the most likely to live with their parents, the numbers show a growing number of older millennials are moving back in. For example, 25 percent of people ages 25 to 29 are living with a parent, up from 18 percent 10 years ago. What's more, 13 percent of Americans ages 30 to 34 are living with their parents, up from 9 percent a decade ago.

Richard Fry with the Pew Research Center says the poor job market for young men in particular is fueling the trend of adult children living at home with their parents. Nearly 6 percent of men ages 25 to 34 years old are unemployed, according to the Bureau of Labor Statistics (the national average just dipped below 5 percent). Meanwhile, the home ownership rate for those under the age of 35 is at a 20-year low.

"These trends could have larger implications for future economic growth and financial stability, as housing represents over 60 percent of of assets held by the middle class and roughly 15 percent of gross domestic product," The Washington Post reports. "Since the share of 25- to 34-year-olds living with a parent has been steadily rising since reaching its lowest point 45 years ago, it may be years until we experience the full significance of these new living arrangements. With its potential impact on the economy, though, it’s a trend we may not be able to ignore."

Source: "The Real Reason So Many Millennials Are Living at Home," The Washington Post (June 30, 2016)

Young Adults Without Diploma Face Bigger Hurdles To Home Ownership

Young adults without a college diploma may face the greatest hurdles to owning a home, suggests new research based on a survey of 31,000 respondents.

College graduates between 18 and 34 without student loan debt will need just over five years of additional savings to afford a 20 percent down payment for a starter home (defined in the study as the median home at the bottom third of the market), according to new research released this week by Apartment List, a rental listing website. For college grads with student loans, it’ll take about 10 years.

But for young adults who haven’t graduated from college, the wait to buy a home could take up to 15.5 years, the study shows. (Note: Some mortgage loans available require lower down payments than 20 percent and could shorten the wait time.)

Regardless, “it’s really everywhere that people without college degrees won’t be able to afford homes,” says Andrew Woo, director of data science at Apartment List. “They could be stuck renting for a long time.”

Those without college degrees tend to have lower incomes (college grads make about $22,600 more than non-grads), but those without degrees also tend to get less help with down payments from family and friends, the study says.

Case in point, college graduates without student debt tend to get more than $8,000 of assistance with loans. College graduates with student loans expect to get nearly $4,000. But those without a college degree tend to receive just over $2,000, according to the study.

In some cities, the issue is particularly dire for non-grads. For example, in San Jose, Calif., a young adult without a college degree would need to save for 48 years to afford a 20 percent down payment on a starter home there. College grads with student debt would need to save for 15 years, and college grads without debt would need to save for about 4.5 years.

Source: “Homeownership Elusive for Adults Without Degrees,” The Wall Street Journal (May 23, 2016) [Log-in required]

HARP Has Helped More Than 3M Home Owners

Borrowers’ last chance to take part in the Federal Housing Finance Agency’s Home Affordable Refinance Program is nearing. The HARP program is set to expire at the end of this year. Yet, more than 325,000 borrowers are eligible for the program, the government estimates.

The program has reached more than 3.4 million home owners since it was launched in 2009. Borrowers have saved $2,400 per year, on average, with HARP, FHFA reports.

The HARP program was created to help borrowers who are current on their mortgage payments but who have little to no equity in their home. The program allows eligible home owners to still take advantage of low interest rates and be able to refinance despite having little to no equity.

In the first quarter alone, more than 19,000 home owners refinanced their home through HARP, FHFA reports.

Eligible borrowers for the program must meet several criteria, including have a remaining mortgage balance of $50,000 or more; have a remaining loan term of at least 10 years; and have a current mortgage rate that is at least 1.5 percent higher than market rates.

FHFA is holding its final HARP outreach webinar on May 24.

Source: Federal Housing Finance Agency