A Low Credit Score Costs Home Buyers Big—Here’s How Much

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With skyrocketing home prices and rising mortgage rates, many home buyers are frantically looking for ways to cut down on costs wherever they can. But in one area, it makes sense to ramp up spending, experts say—paying off old bills, debts, and credit cards.

That’s because a very good credit score can save home buyers tens of thousands of dollars over the life of their mortgage, according to a recent report from online financial services marketplace LendingTree. That’s not chump change.

LendingTree estimates borrowers with very good credit scores of 740 to 799 can save $29,106 over those with a fair credit score of 580 to 669. The savings would be on the annual percentage rate of a 30-year fixed mortgage of $234,437, which is the average size of those loans, according to the report. Those savings are the price of a decent new car.

Aside from monthly costs, it’s a lot harder to get a loan with poor credit.

“When you’re taking out a mortgage, you’re asking a lender to invest in you for a very long time,” says Kali McFadden, senior research analyst at LendingTree.

“If you have a higher credit score, it means statistically you’re more likely to pay your bill on time,” she says. But “if you have a lower credit score, lenders are taking a bigger risk that you’re not going to pay your mortgage off or [you’ll go into] foreclosure.”

Credit score sweet spot
The ideal credit score is from 760 to 780 and up, McFadden says. Anything much below that and lenders are more likely to charge a higher interest rate or pile on more fees to compensate for the risk that the borrower may miss payments.

She recommends that would-be borrowers get their credit reports and resolve any outstanding issues before applying for a loan. They should also pay down or pay off old balances, not open or close any credit cards, and pay their bills on time.

That’s not to say every lender will offer rates to those with sterling credit, says Don Frommeyer, a mortgage loan originator at Marine Bank in Indianapolis. But some will and others will knock off various charges, such as filing and overnight fees.

In addition, many buyers will save substantially less over the life of their loan. That’s because after five or six years, many are likely to refinance their loan or move into a new home requiring a new mortgage.

Still, buyers should focus on boosting their credit score.

“You always save money with a higher credit score,” Frommeyer says. But “you can pay a fee for a lower credit score.”

Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor at St. John’s University. She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She is also a licensed real estate agent with Charles Rutenberg. Follow @claretrap on Twitter, or contact her at clare.trapasso@realtor.com. Follow @claretrap

Is Family Mortgage Debt Out of Control?

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Some homeowners have recently done a “cash out” refinance and have taken a portion of their increased equity from their house. Others have sold their homes and purchased more expensive homes with larger mortgages. At the same time, first-time buyers have become homeowners and now have mortgage payments for the first time.

These developments have caused concern that families might be reaching unsustainable levels of mortgage debt. Some are worried that we may be repeating a behavior that helped precipitate the housing crash ten years ago.

Today, we want to assure everyone that this is not the case. Here is a graph created from datareleased by the Federal Reserve Board which shows the Household Debt Service Ratio for mortgages as a percentage of disposable personal income. The ratio is the total quarterly required mortgage payments divided by total quarterly disposable personal income. In other words, the percentage of spendable income people are using to pay their mortgage.

Is Family Mortgage Debt Out of Control? | MyKCM

Today’s ratio of 4.44% is nowhere near the ratio of 7.21% during the peak of the housing bubble and is instead at the lowest rate since 1980 (4.38%).

Bill McBride of Calculated Risk recently commented on the ratio:

“The Debt Service Ratio for mortgages is near the low for the last 38 years. This ratio increased rapidly during the housing bubble and continued to increase until 2007. With falling interest rates, and less mortgage debt, the mortgage ratio has declined significantly.”

Bottom Line

Many families paid a heavy price because of questionable practices that led to last decade’s housing crash. It seems the American people have learned a lesson and are not repeating that same behavior regarding their mortgage debt.

Don’t Let Fear Stop You from Applying for a Mortgage

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A considerable number of potential buyers shy away from jumping into the real estate market due to their uncertainty about the buying process. A specific cause for concern tends to be mortgage qualification.

For many, the mortgage process can be scary, but it doesn’t have to be!

In order to qualify in today’s market, you’ll need to have saved for a down payment (73% of all buyers made a down payment of less than 20%, with many buyers putting down 3% or less), a stable income and good credit history.

Throughout the entire home buying process, you will interact with many different professionals, all of whom perform necessary roles. These professionals are also valuable resources for you.

Once you’re ready to apply, here are 5 easy steps that Freddie Mac suggests you follow:

  1. Find out your current credit history & score – even if you don’t have perfect credit, you may already qualify for a loan. The average FICO® Score of all closed loans in September was 724, according to Ellie Mae.
  2. Start gathering all your documentation – income verification (such as W-2 forms or tax returns), credit history, and assets (such as bank statements to verify your savings).
  3. Contact a professional – your real estate agent will be able to recommend a loan officer that can help you develop a spending plan, as well as determine how much home you can afford.
  4. Consult with your lender – he or she will review your income, expenses, and financial goals to determine the type and amount of mortgage you qualify for.
  5. Talk to your lender about pre-approval – a pre-approval letter provides an estimate of what you might be able to borrow (provided your financial status doesn’t change), and demonstrates to home sellers that you are serious about buying!

Bottom Line

Do your research, reach out to professionals, stick to your budget, and be sure that you are ready to take on the financial responsibilities of becoming a homeowner.

Number of Buyers Putting Down Less Than 10% Hits 7-Year High

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According to Black Knight Financial Service’s Mortgage Monitor Report, 1.5 million Americans have purchased a home with down payments under than 10% over the last 12 months. This is great news for buyers as this marks a 7-year high.

Many mortgage programs offered by agencies like Freddie Mac and Fannie Mae allow buyers to put down as low as 3% to purchase their dream homes. The strength of the housing market has aided buyers who used low-down-payment programs to buy. As a recent CNBC article points out,

“Defaults on recent low down payment loans, so far, are slow, but that is as much a factor of the good credit quality as it is the strength of the housing market. Home prices are rising incredibly fast, meaning those borrowers are gaining equity in their homes quickly.”

Low down payments aren’t just great for first-time homebuyers. These programs have allowed homeowners who want to capitalize on the equity they have in their homes to use the profit from their sale to pay off high-interest credit cards, fund education or even start a business.

According to a new Census Report, the Annual Survey of Entrepreneurs , home equity was used to start 7.3% of all businesses in the United States, which equates to over 284,000! The industries that saw the most growth from home equity are accommodation & food services, manufacturing and, retail trade.

Bottom Line

Gone are the days of 20% down or no mortgage.’ What could you build with the equity in your house? Let’s get together today to evaluate your ability to achieve your dreams today!

Interest Rates

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To start the year, housing experts all agreed on one thing: 2017 was going to be the year we would see mortgage interest rates begin to rise. After years of historically low rates, and an improving economy, the question wasn’t if they would increase but instead how much they would increase. Some thought we could see rates hit 5-5.5% by the end of the year.

However, the exact opposite has happened. Instead of higher rates as we head into the middle of 2017, we now have the lowest rates of the year (as reported by Freddie Mac). Here is a graph of mortgage rate movement since the beginning of the year:

Mortgage Interest Rates Reverse Course in 2017 | MyKCMProjections still call for an increase…

Four major entities (Freddie Mac, Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors) are still projecting that rates will increase by the fourth quarter of the year.

Mortgage Interest Rates Reverse Course in 2017 | MyKCMBottom Line

No one knows for sure where interest rates will be in six months. However, if you are thinking about buying your first house or trading up to the home of your dreams, you can still get a mortgage at historically low rates RIGHT NOW.

Mortgage Rates Impact on 2017 Home Values

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There is no doubt that historically low mortgage interest rates were a major impetus to housing recovery over the last several years. However, many industry experts are showing concern about the possible effect that the rising rates will have moving forward.

The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors are all projecting that mortgage interest rates will move upward in 2017. Increasing interest rates will definitely impact purchasers and may stifle demand.

In a recent study of industry experts, “rising mortgage interest rates, and their impact on mortgage affordability” was named by 56% as the force they think will have the most significant impact on U.S. housing in 2017. If rising rates slow demand for housing, home values will be impacted.

To this point, Pulsenomics, recently surveyed a panel of over 100 economists, investment strategists, and housing market analysts, asking the question “In your opinion, at what level will the 30-year fixed rate mortgage rate significantly slow home value appreciation?” The survey revealed the following:

Mortgage Rates Impact on 2017 Home Values | MyKCM

Bottom Line

Most experts believe that rates would need to hit 5% or above to have an impact on home prices.

Student Loans = Higher Credit Scores

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According to a recent analysis by CoreLogic, Millennial renters (aged 20-34) who have student loan debt also have higher credit scores than those who do not have student loans.

This may come as a surprise, as there is so much talk about student loans burdening Millennials and holding them back from many milestones that previous generations have been able to achieve (i.e. homeownership, investing for retirement).

CoreLogic used the information provided on rental applications and the applicants’ credit history from credit bureaus to determine if there was a correlation between student loan debt and credit scores.

The analysis concluded that:

“Student loan debt did not prevent millennials from access to credit even though it may delay their homebuying decisions.”

In fact, those with a higher amount of debt actually had higher credit scores.

“Renters with student loan debt have higher average credit scores than those without; and those with higher debt amounts have higher average credit scores than those with lower student loan debt amounts.”

Bottom Line

Millennials are on pace to become the most educated generation in our nation’s history, with that comes a pretty big bill for education. But there is a light at the end of the tunnel:

“Despite the fact that student loan debt has grown into the nation’s second largest consumer debt, following mortgage, and has created a significant financial burden for millennials, it does not appear to prevent millennials from accessing credit.”