Avoiding Homeownership Barriers
Think you can’t buy a home? Think again.
In November 2013, Trulia conducted a survey of renters who wanted to buy a property, inquiring about the challenges they faced. Several hurdles to home ownership were mentioned by survey respondents, all of which are described below.
Let’s take a look at each of these barriers to homeownership and see how you can overcome them.
Mortgage Pre-Qualification
The ability to qualify for a mortgage is determined by a combination of criteria. Let’s take a look at the issues that buyers have the greatest trouble with:
Not Enough Money for a Down Payment
Saving for a down payment was cited by a whopping 55 percent of survey respondents as the most difficult challenge to overcome when it came to purchasing a property.
What exactly is the issue here? In order to avoid paying mortgage insurance, many lenders want you to put down 20% of the purchase price on a home. Given the current average property price of around $200,000, this can be a significant sum to come up with. But it’s not out of the question.
If having a home is a desire of yours, make it a priority. Examine your present budget and identify areas where you may save money. Is it possible to rent a smaller apartment? Is it possible for you to temporarily return to your parents’ house? Is it possible for you to work a second job?
Place the funds in a high-yielding savings account. Also, resist the temptation to cash in a life insurance policy, borrow from your 401(k), or put your funds into high-risk investments in the hopes of a speedier return. In the long run, these behaviors aren’t worth it.
Having a Bad Credit Record
FICO, or the Fair Isaac Corporation, assigns you a credit score. The credit history gathered by three major credit-reporting bureaus: TransUnion, Experian, and Equifax, determines it. (In reality, you’ll have three credit scores, one for each bureau.) Lenders are usually interested in the median score.)
A credit score of 740 or higher is regarded good by most lenders, while anything below 600 is considered bad.
It’s time to learn about your credit score if you don’t already know it. Each year, you can (and should) request a free credit report from each of the three credit bureaus. All of these can be seen at annualcreditreport.com.
(Please note that you will receive a credit report, which will not include your numerical FICO credit score.) However, it will show your credit history, including any negative marks that may exist.)
Examine your report carefully, and if you find any inaccuracies, call the credit bureau right once to dispute the claims.
What if there aren’t any mistakes? Maintaining excellent credit practices should be a priority. The length of time your accounts have been open, the amount of outstanding debt you presently have, whether you’ve recently opened new accounts, the sorts of credit you utilize, and your payment history all contribute to your credit score.
Being unemployed over an extended period of time
Lenders will look at your work history for the last two years. This could be a stumbling barrier for you if you’ve worked a lot of part-time jobs, recently graduated, or otherwise don’t have a consistent income.
In these situations, the best course of action is to ensure that all of your other financial ducks are in a row. Clean up your credit, put money aside, and make sure you pay your payments on time. Reduce or eliminate your debt to bring your debt-to-income ratio down to a manageable level.
Even if your income fluctuates, being able to demonstrate financial responsibility might help you prove you’re not a loan risk. If you have any significant assets, make sure to disclose these as well.
Incapable of repaying existing debts
Lenders prefer you to spend less than 36% of your gross monthly income on all of your obligations (mortgage, car loans, student loans, credit cards, etc.). For them, the bigger your debt-to-income ratio, the more risky you are. (And, let’s face it, the less freedom you have to find your dream home.)
If your debt is out of hand, it’s time to cut up your credit cards and start paying off your debts as quickly as possible. Start with the card with the highest interest rate and put all you have toward paying off the bill, then work your way down the list to the card with the next highest interest rate. This will not only make you more appealing to lenders, but it will also provide you more financial flexibility when it comes time to buy a home.
Factors Affecting the Economy at Large
Aside from “qualifying for a mortgage,” which requires a substantial down payment, a secure job, decent credit, and low debt levels, poll respondents mentioned two major economic issues as barriers to homeownership.
Mortgage Rates are Increasing
Recent hikes in mortgage interest rates have received a lot of attention, but the truth is that interest rates should be the least of your concerns. Rates have been hovering between 3.5 percent and 4.5 percent during the first few months of 2014, and waiting to buy a property based on short-term changes can be a risky bet.
For example, if you buy a $200,000 property and pay a 3.5 percent interest rate instead of a 4.5 percent interest rate, the difference in your monthly payment will be around $100. If an extra $100 per month would break the bank for you, you may not be in the best financial position to consider homeownership.
If you’re only looking to save money, keep in mind that you can always refinance if interest rates fall. If you locate the perfect property with all of the appropriate facilities in the perfect location, it might not be worth it to pass it up simply because rates have increased by 1%.
Home prices are rising, and there is a scarcity of available homes.
There’s not much you can do about rising property prices or a lack of available homes, but there are several methods to get around these challenges and still get a nice home.
Extend the parameters of your “favorite neighborhood” to include regions outside of your ideal location. If you look around, you can find other fantastic surrounding areas that you’d enjoy just as much.
Consider purchasing a fixer-upper and putting in some sweat equity, especially if the home merely need cosmetic improvements rather than a structural overhaul. If Property Brothers has taught us anything, it’s that a less expensive house with a reasonable renovation budget can sometimes be better than a move-in ready home that you can’t alter. (Plus, you can redecorate at your own pace as you save money.)
Finally, broaden your horizons by considering homes you might not have explored previously. Consider duplexes, townhomes, condos, and other types of living arrangements in addition to the traditional single-family home.
Image by MrHarman via Wikimedia Commons.