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With home prices up 7.1% nationally from May 2017 to May 2018, and are forecast to increase by 5.1% from May 2018 to May 2019*, many home buyers will see their home buying power reduce this year.
If you or anyone you know is buying a home this year, the chances are that you’ll be competing against multiple offers and low inventory issues. Buying a home in a competitive market can be stressful, but it doesn’t have to be. Here are five ways to improve your home buying power, so you'll have a better chance of purchasing the home you want:
1. Consider Your Debt Strategy
One of the biggest influences on your home buying power is the overall state of your finances. In 2017, 88% of homebuyers financed their home purchase, with 90% being the typical amount financed. Saving a large sum of money for a down payment is often a good idea, but that doesn’t mean it is always the best idea. Discuss with your loan officer if there is a benefit to reallocating some funds from your down payment toward paying down other debts to improve your debt-to-income ratio. This strategy may help you to qualify for a larger mortgage, with a lower down payment, so you may be able to afford a higher-cost home.
2. Review Your Credit Reports Before Applying For A Home Loan
When you apply to take out a home loan, your credit is one of the key factors that determine your home buying power as it influences which home loans you are eligible for, your interest rate, and whether or not your home loan is ultimately approved.
While you are saving for your down payment and closing costs, consider reviewing your credit reports before you begin the home buying process. You are entitled to a free copy of your credit report every 12 months from each credit reporting company, Equifax, Experian and TransUnion. Order your credit reports from annualcreditreport.com or call 1-877-322-8228. Be prepared to provide your name, address, social security number, and date of birth to verify your identity.
3. Consider an Adjustable Rate Mortgage (ARM)
Depending on bond market conditions, the interest rate and monthly payment on an adjustable rate mortgage (ARM) can often be lower than a fixed rate mortgage. If you are a first-time home buyer looking to purchase a starter home or intend to only be in your home around five years, you may be able to benefit from an ARM to comfortably finance a home purchase. Depending on the adjustable rate mortgage (ARM) you select, your rate will be fixed for a period of up to ten years. For example, in a 5/1 Hybrid ARM, the interest rate is fixed for the first five years, and the rate then adjusts annually (the 1 in 5/1) until the loan is paid off or refinanced.
Qualification criteria for an adjustable rate mortgage (ARM) are similar to other home loan options. Qualification is determined by the borrower’s credit score, debt-to-income (DTI) ratio, and the loan-to-value (LTV) ration of the home loan.
4. Consider the Use of Gift Funds
Gift funds from friends and relatives can often be used for a down payment. Gift funds could be useful if you find yourself in a bidding war where you’ve maxed out your mortgage options and the only other option is to come to closing with more money to make up the shortfall. If you are the recipient of a gift fund, obtain a written agreement from the giver that explains that there is no expectation of repayment. Some home loan types require additional documentation and have strict guidelines regarding how much of your own money must be applied to the down payment, in addition to any monies provided as a gift, so let your loan officer know if you intend to use gift funds towards your down payment or other loan costs.
5. Renovate A Fixer Upper
Low housing inventory in many cities is making fixer uppers more tempting to many home buyers. If there are few appealing home options in your desired neighborhood or within your budget, purchasing and renovating a fixer-upper can help to stretch your budget to afford a home in a more desirable location or with less long-term compromises. For first-time home buyers, a fixer-upper can provide the opportunity to enter the market at a lower price point than a fully renovated home. The benefit to all home buyers is that you get to finish the home in a style and with the finishes that you select, not the former homeowner or flipper.
Certainty Home Loans offers home renovation loans that enable you to roll the mortgage payment and renovation costs into one affordable monthly payment.
Ready to get started on your path to homeownership? Contact a Certainty Home Loans mortgage professional in your state to determine how much home you can afford.
*CoreLogic Home Price Index and HPI Forecast for May 2018
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