Remember when real estate experts and professionals worried about young individuals or Millennials weren’t purchasing enough houses? Those days are almost over, with younger adults from the age of eighteen to thirty-five purchasing more properties compared to other generations, according to the latest studies from the NAR or National Association of Realtors.
Although, a lot of these individuals are purchasing a property for the first time. It means they are also applying for housing loans for the first time. Then, what do they need to know about working with housing loan lending firms, as well as financing their home purchases? There is a lot of jargon for young buyers that need to be deciphered and tons of steps to complete to help them qualify for a housing loan.
But lending professionals offer one important piece of advice: Do not take out a debenture that you cannot afford to pay every month. Choosing the best home debenture is more complicated compared to picking the one with the lowest possible interest rate. Deciding to purchase a house is a huge step at any age, but for young adults, the task can be pretty daunting.
According to a 2018 National Association of Realtors study, young adults made at least 35% of all property purchases during the past years. That is up from 34% the previous year. That is a lot of new purchasers entering the market and working with housing loan lending firms for the first time.
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What can they afford?
The most crucial question for these individuals to ask is, “How big of a loan payment can they afford to make every month?” They need to draft their budget before they start looking for a loan or a house. They need to find out how much money comes into their monthly bank accounts.
They then list all their monthly expenses, like varying expenses such as the amount they spend every month for entertainment, eating out, and groceries. They will then be able to find out how much of a housing loan payment they can afford. People should not take a debenture that consumes all their extra income.
They do not want to be house-poor, which is what happens when they spend all their extra funds on the house. Borrowers should also remember to include every part of their monthly loan amortizations. They will also need to pay interest and principal on their debenture.
But there is a good chance they have to pay extra with each housing loan amortization to cover the cost of their property taxes and insurance. If the borrower’s taxes and insurance come out to a combined six thousand dollars a year, it means they will need to pay five hundred dollars more every month with their housing debenture payment. It can be pretty hard for young adults to find out how much home debenture they can afford.
According to experts, these individuals follow the fifty/twenty/thirty rule: They should spend up to 50% of their after-tax income on important things like food and housing; 20% on financial priorities like building their savings and repayments of their current debts; and 30% on lifestyle choices like entertainment and vacations. Borrowers should not allow themselves to purchase a property priced pretty high that the housing loan payment, insurance, property tax, and other common fees, plus their food costs, exceed 50% of their take-home pay.
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Get preapproved for a mortgage
Individuals might be tempted to start their home search by immediately looking for a house for sale. But they need to get preapproved for a home debenture first. During the preapproval phase, lending firms will review the borrower’s credit and ask for documents that prove their debts and income, everything from their monthly bank statements, income-tax returns, and their weekly pay slip stubs.
Lending firms will review these details and provide borrowers with a pre-approval letter stating how much of a debenture they are willing to provide them. The lending firm must say the borrower can qualify for a two hundred thousand dollar housing debenture; they will not waste time looking for a house that costs three hundred thousand dollars. Having preapproval letters also makes individuals attractive borrowers.
Sellers prefer working with individuals they know can already qualify for housing loans. According to real estate agents, preapproval is crucial for all property purchasers, but it is a must for young Millennials who have never bought a house before.
The last thing people want is to start looking at houses, fall in love with one and find out later on that they are not able to purchase it. Individuals need to get thorough preapproval first and know the nuances of what they can truly afford before looking at houses for sale.
Know what credit reports say
Lending firms rely on the person’s three-digit credit score to find out whether they can qualify for a home debenture and at what interest rate (IR). The higher their credit score – 740 or higher are excellent scores – the more likely they will nab a lower IR, and smaller monthly amortization.
They might have to take out bad credit housing loans if the score is too low. However, such debentures will come with higher IRs. Before looking for houses, people need to visit credit rating websites. From here, they can order a copy of their scores from credit reporting agencies maintained by national credit bureaus. These things are for free, once a year.
These reports will list down how much the person owes in debentures and on their credit cards. It will also show if they missed any payments or made late payments in the past. The score is made up of details contained in the report. If the person sees missed or late payments, they will know that their score will suffer. They can boost these scores by making payments on time, as well as by paying their credit card debt. People can also order their actual score from any rating bureau. But they will need to pay for it.
Pay close attention to Annual Percentage Rates
When looking for a housing loan, people might be tempted to go with the debenture that comes with the lowest loan rate. But they need to pay close attention to their debenture’s APR or Annual Percentage Rate. These numbers are more accurate representations of what individuals will pay in total every year of their loan. The lower the person’s Annual Percentage Rate, the better.
Bigger down payments (DP) can help
Coming up with the fund for a DP can be a significant struggle for most Millennials. A 10% DP on the house costing two hundred thousand dollars comes out to twenty thousand dollars. The good news is that there are a lot of programs that need smaller DPs. If young adults take out a debenture insured by the FHA or Federal Housing Administration, they will only need a DP of 3.5% of their property’s purchase price if they have a good or excellent credit score.
Some traditional debenture programs – conventional loans are any that government agencies do not insure – require DPs as low as 3%. The more borrowers can provide as DPs, the better. Suppose they provide a DP of at least 20% of a property’s purchase price. In that case, individuals will not have to pay for PMIs or Private Mortgage Insurances, additional fees charged to individuals to protect their lending firms in case they default on their debentures. And if borrowers come up with higher DPs, they will boost their odds of qualifying for lower interest rates.
This thing is not a quick process
It differs by the lending firm, but borrowers can expect their debenture approval to take thirty days or more after they send in their completed URLA or Uniform Residential Loan Application to the day they finalize their housing loan. That is because the debenture needs to go through an underwriting process.
It is during this stage that the lending firm determines how the borrower will pay the debenture back on time. At the start of this process, individuals will fill out the application form. They will have to include basic info such as their age, name, current address, and Social Security number.
They will also need to provide details regarding their debts and income. The next thing to do is to send the lending firm copies of the borrower’s last two paycheck stubs, at least two months of bank information, the last two years of their income tax returns, as well as their most recent W-2 statements.
Lending firms will use these details to verify that the individual earns enough to afford their monthly amortization. The lending firm will also run the individual’s credit. If they do have a black spot on their credit reports and low credit scores, expect lending firms to ask a lot of questions. People might also face much higher IRs.
The process ends when the individual sign the dotted line during the closing process, usually held in the office of the title insurance firm. Here, individuals will sign some documents transferring ownership of their new house to their name. People will also sign papers stating that they promise to pay their debenture back on time.