Buying your own home is one of the most important financial steps you will ever make. But many first time home buyers should remember the first step in your house buying process should be getting the loan financing set up before you begin looking at homes. If you cannot close the deal, what is the point of looking at homes, right?
The first step in getting the mortgage financing set up is the pre-qualification. Of course, a loan pre-qualification involves the mortgage lender evaluating your eligibility for a home loan. The mortgage officer will have you fill out a basic application that collects your essential details: employer information, gross income, assets, and current expenses. The lender will give you a rough idea of what you can qualify for.
Getting pre-qualified as a first time house buyer is a very important part of the home buying process. Pre-qualifying for a loan tells you what you can afford and the types of homes to look at. It also is important to have an idea what your payment will be. When you have been pre-qualified for a home loan, you can go out and find your perfect home and make an offer and qualify for the loan, hopefully.
If you have not been pre-qualified before you are looking at houses, you will run a risk of losing the home because other buyers have already been pre-qualified.
To get pre-qualified, you will need to have all of the information on hand about your employment, income and debts. With that information, you can contact the mortgage officer and get a good idea of what you can afford.
The Next Step – Pre-Approval
The next step is very important: getting pre-approved. This step is more involved. It is where you complete the full mortgage application and provide your lender with all of the documentation to verify your income, assets and expenses.
You will provide the lender with your bank statements, W-2s, two years of tax returns and pay stubs. If you are self-employed, you will provide a profit and loss statement for the year to date. Your lender also will run your credit report.
Once you have been pre-approved, you will get a conditional commitment from the lender for an exact amount that you are qualified for. This will allow you to look at homes at or under that price. This will put you in a good position when you are dealing with a seller. He or she will know that you have financing and can close on the deal.
Many experts recommend completing both pre-qualification and pre-approval before you look at homes. This way, you are not wasting precious time looking at homes that are out of your price range. Getting a pre-approval also means you will be able to move fast when you find the home for you.
This can be important in the hot market of 2018. There is a general shortage of homes in the US right now, and some areas have homes receiving multiple offers as soon as the house hits the market. People who have their pre-approval letter will be able to make a stronger offer than someone who does not have financing in place.
First Time Home Loan Commitment
The next step in the loan process is known as the loan commitment. This is issued when the bank has given its final approval on you and on the specific home. It means the home will need to appraise at or above the sales price. The bank could require more information if the appraiser thinks there is anything about the home that should be investigated further that could affect the value.
Your credit and income will be verified again before a closing date is set.
The Silver Lining
Getting pre-qualified is an important step in the home buying process as it gives you a rough concept of what you can qualify for. But remember that the pre-qualification is just theoretical: The lender has not verified anything or taken any of your financial documentation. When you actually give them your financial documents and permission to check your credit report, that is when you have actually been pre-approved for the loan.
It is a mistake to assume the bank will give you a loan unless you have been pre-approved. This mistake can end up costing you a new home. So be sure that you have given your lender all of the documents they request so you can get pre-approved before you are looking at homes.
Will Higher Mortgage Rates Slow Down Purchase Activity for First Time Home Buyers?
First time home buyers are getting hit with two things at once. First, home prices are about 7% higher than a year ago. Second, mortgage rates are about 1% higher than this time last year.
This means first time buyers are seeing 16% higher costs in their principal and interest payments to buy the same home as a year ago. This is usually more of a problem for the first-time buyer because they do not usually have a substantial down payment in the form of equity from a previous home. Another challenge for first time buyers is that average wages have only increased by about 2.5% from a year ago.
It is unlikely that things will get better soon, as far as home prices and interest rates go. Many experts expect home prices to continue to rise steadily in the next year, and for interest rates to hit 5.1% by the end of 2019.
The higher prices and mortgage rates are causing some buyers to buy smaller homes that are further from where they work to keep costs down. However, some experts say that the recent rise in interest rates should not have a substantial impact on the housing market.
Mark Fleming, the chief economist at First American Financial Corporation, stated this month that short term rate changes should not have a major impact on home sales.
He said it is important to remember that the popular 30-year, fixed rate mortgage is closely related to the 10-year Treasury bond. The Federal Funds rate hike does not drive up the yield on the 10-year Treasury exactly, the expectations of higher inflation definitely does. The decision by the Fed recently to increase interest rates for the sixth time in the last 18 months was viewed by the stock market as a reaction to the chance of higher inflation because of improvement in the labor market and economy.
The economist said that since the end of the last recession, the fixed rate mortgage rate for 30 years has been about 1.7% higher than the 10-year Treasury bond yield. That means rates today are about 4.75%. If the economy continues to be fairly strong, it is likely that concerns about inflation will have an effect on the Treasury note and will push rates higher.
First American Financial determined that existing home sales actually went up in May 2018 to 6.11 million, which was up .8% from April and was a 64% increase from February 2011. The market potential for existing home purchases was at 1.17 million, which was still 16% below the peak before the recession. But this is a good sign that even with higher interest rates, home sales continue to be quite brisk. This could indicate that the economy is doing better, wages are somewhat higher, and people are better able to afford higher home costs, even first-time home buyers.
Fleming wrote recently that if the fixed rate mortgage for 30 years rises to 5%, which most experts think will happen in 2018 or 2019, the effect on the housing market could be a small decline to 6.1 million home sales. Data suggests that rates are rising because economic indicators are getting better, which means incomes are rising. This should hopefully offset any rise in borrowing costs.
Experts also note that the higher borrowing costs is less of a concern for first time buyers; the larger problem is whether they are able to find any homes they can afford.
Hopefully, rising rates and prices will not cause first time home buyers too much stress to buy their first home. Rising wages and decreasing unemployment may help to make this a reality.