If you’ve got the itch to ditch your landlord and take the leap to homeownership, mortgage rates are still low by historical standards. But beware because they are expected to begin creeping higher throughout the year.
“The cost of renting is really high right now. Rents have been rising and rising,” says Lawrence Yun, chief economist at the National Association of Realtors. “Renters are getting squeezed, and some want to convert to ownership.”.
The NAR expects 30-year, fixed-rate mortgages to average 3.80 percent in the first quarter. However, mortgage rates are forecast to start inching higher throughout the year. The NAR forecasts an average 4 percent rate in the second quarter, 4.3 percent in the third quarter and 4.7 percent in the fourth quarter.
Economic forces, including an improving U.S. labor market and faster economic growth, are conspiring to push mortgage rates higher this year. “The Federal Reserve is likely to raise short-term interest rates in the summer, which will be a signal for the rest of the market for rates to go higher,” Yun says.
“There’s a window of opportunity for buying and refinancing at crazy-low rates, but it’s closing,” says Gina Pogol, loan expert at Charlotte, North Carolina-based LendingTree.
If this is the year you want to sign on the dotted line and become a homeowner, experts have several suggestions to help you move quickly through the mortgage approval process.
The overall lending environment remains stringent, and the best mortgage rates will be awarded to those with higher credit scores. Your credit score is a three-digit number generated using information on your credit report, and generally, the higher it is, the better. Here’s what you need to do to get the best rates.
Mind your credit score. “Minimum credit scores required by lenders have steadily dropped, and mortgage insurers’ underwriting guidelines have also loosened a bit, but it’s still a little tough,” Pogol says. “Average FICOs of applicants approved for home loans continue to come down, but they’re still hovering around the 700 mark. Unfortunately, three-fourths of U.S. consumers have scores lower than 700.”
What’s an ideal credit score? “To get the best rate, strive for above 740. That is the benchmark for A-plus lending,” says Jeannie Meronk, assistant vice president and mortgage loan officer at First State Bank of Illinois.
Visit your lender before you hit the open houses. Create a game plan that makes sense for your budget. It pays to talk to a lender about what you can afford and qualify for before you fall in love with a home outside your price range.
“It is really important from a budget standpoint to be shopping in the right price range,” Meronk says.
Just because you qualify for a certain loan amount doesn’t mean that is what you should spend. Consider your monthly budget, and determine what level of monthly payment feels comfortable. Remember that there will be other costs relating to homeownership, including property taxes, maintenance and unexpected repairs.
Also know that most sellers won’t take an offer seriously unless you have been preapproved for a loan. “Preapproval means actually applying for a loan, having your credit checked and your income documented. Preapproved means that as long as the property meets the lender’s requirements, you can close,” Pogol says.
Don’t make any changes to your financial picture. Once you’ve been preapproved, this is not the time to open new credit cards, change jobs, transfer large sums of money or make big-ticket purchases using credit. “Once you are preapproved, don’t apply for any new credit. If you go ahead and finance furniture, it can mess up the amount that you were preapproved for,” Meronk says.
If you are fortunate enough to have a parent, in-law or relative who is willing to gift you some or all of your intended down payment, be sure to talk with your lender about this. You will need to document this properly with a letter for your lender.
If you are thinking of buying a rental property, however, gift money can’t be used toward a down payment. It only can be used for a primary residence, according to Meronk.
If you are self-employed, expect to jump through more hoops. Be prepared to provide two years’ worth of tax returns. If your income fluctuated from one year to the next, underwriters will average the income from the two years. Also, underwriters will look at your income after your business deductions have been taken.
“It often comes as a surprise to self-employed applicants that their gross income isn’t counted by underwriters. It’s their taxable income that’s used. So if you write off every meal and every vacation as a business expense, that comes off the top of your income,” Pogol says.