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Higher Credit Scores Needed For Home Purchases

Average Homebuyer Score Rose from 700 in 2005 to 732 in 2016

Higher credit scores needed for homebuying in 2018.
Welcome to the 2018 home-buying market: Rising demand and an extremely tight supply of homes, especially in the critical starter-home market, make it difficult to realize your goal of home ownership.

In this market, you’ll need two important things to land your dream home – more money and a higher credit score.

Data from the Joint Center for Housing Studies (JCHS) at Harvard University highlight the credit score issue.

According to the 2017 JCHS study, “The State of the Nation’s Housing – 2017,” the median credit score for successful mortgage loan applications increased from a FICO score of 700 in 2005 to 732 in 2016.

Lenders are still conservative in their risk assessments – aided in part by regulations put in place during the housing crisis.

In the pre-crisis market of 2005, around 10% of conventional first lien mortgages went to borrowers with a credit score below 620. That number fell to nearly zero by 2009, and as of 2016, it was still at 0.1 percent.

Just over 3 percent of 2016 loans were issued within the 620 to 659 credit score range, while approximately 67 percent were issued to borrowers with credit scores of 740 or higher.

Other Metrics

Along with your debt-to-income (DTI) ratio, your credit score is one of the most important metrics that lenders use to evaluate your ability to repay a mortgage loan. A good credit score can help you overcome a poor DTI.

According to the Wall Street Journal, Inside Mortgage Finance reports that in the fourth quarter of 2017, approximately 78 percent of loans with DTI ratios above 45 percent went to borrowers with credit scores of 700 or greater.

A DTI of 45 percent is generally considered the upper limit for issuing conventional loans, but mortgage backer Fannie Mae changed the limit to 50 percent last year as long as other criteria are met.

Other Options

What can you do if your credit score isn’t sufficient? You can consider a Federal Housing Administration (FHA) loan that allows lower credit scores and a down payment of as low as 3.5 percent. If you qualify, the FHA will back your loan – reducing your risk to lenders.

Generally, the minimum FICO score for an FHA loan is 580, although it’s possible to go as low as 500 with extenuating circumstances.

Some lenders will require a higher credit score in the 620 to 640 range to accept an FHA loan.

More Alternatives

For those who qualify, Veteran’s Administration (VA) loans are a similar alternative.

Your other option is to work on improving your credit score and building up a larger down payment over time.

Control spending in a way that allows you to pay down your debts, make sure that you pay all your bills on time, and keep your credit card spending below 20 percent of your credit limit if possible. You’ll eventually meet your loan qualification target.

Loan Quality

It’s not just about baseline qualification, but also about the quality of the loan offers.

Jordan Goodman, the personal finance expert and author known as “America’s Money Answers Man,” advises, “Sometimes it makes sense to wait to get your credit score up to a higher level to be able to get a lower interest rate … when you are getting a mortgage, it’s a long-term commitment.”

A fraction of a percentage point can mean thousands of dollars of interest savings over the life of a thirty-year loan.

In this market, it’s all relative. You may have a suitable credit score to secure your preferred home – but are you competing with somebody who has an even better credit score?

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/nzphotonz

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How Can Single People Afford To Buy Homes?

Can single people afford homebuying anymore?Home ownership is a fulfilling but difficult goal. The challenges of being single can make it even more difficult to find an affordable home to buy – especially for single women.

According to data provided by Zillow, the typical single American requires almost 11  years to save up a suitable down payment for a home purchase. Zillow found that married couples or partners can achieve the same down payment goal in less than half the time.

Once a suitable down payment is in hand, singles still face a home affordability hurdle. The average single homebuyer can afford a home up to $176,100, making less than half of America’s homes (45%) within reach for singles. In contrast, the average couple can afford 82% of America’s homes. Four markets (Boston, MA; Denver, CO; Sacramento, CA; and Portland, OR) all have affordability gaps of more than 60% between singles and couples.

Worse for Single Women

The situation is even worse for single women, thanks to a persistent gender wage gap. The U.S. Census Bureau found that women earned just below 80% of men’s average wages in 2015, while the Pew Research Center estimated women’s wages at 83% of men’s wages when part-time workers are included.

With smaller budgets on average, single women can afford an even smaller percentage of homes (39% nationally compared to 52% for single men).

In the top 35 metropolitan housing markets that Zillow analyzed, single men could afford more available homes than single women in every market.

Cincinnati, Ohio was the worst, with single men able to afford 43% more of the available housing stock than women.

Where the Gap Is Smallest

The least gender discrepancy was found in San Jose with a difference of 3% – small consolation because fewer homes in that market are affordable to any singles, regardless of gender. Only 22% of all couples and less than 2% of all singles can afford a home there.

Zillow estimates that to purchase a median home in the San Jose market, single men need to save for 38 years – and single women need to save for a staggering 58 years.

Cincinnati is more indicative of the average market, with single men needing to save for just under fifteen years and single women for just under twenty years to afford a median home – but discrepancies remain.

How Can Singles Buy Homes?

As a single person, how do you approach the home buying market? Start with a realistic assessment of what you can afford.

Review your current income and expenses and determine what sort of monthly payment you can afford to make. Subtract at least 5-10% for regular maintenance, repairs, and the usual unexpected expenses that come with home ownership.

With a monthly payment in hand, use online mortgage calculators to run scenarios and determine what you can afford to pay for a home given your down payment situation and monthly payment limitations.

Get Prequalified

Meanwhile, contact potential lenders to determine your qualification limits. If your budget and home expectations stay within the lender’s limits for your situation, you’re ready to go.

Be prepared for a long search, given that you will have fewer affordable homes from which to choose. Avoid the temptation to overspend and/or jump at the first opportunity without researching the market. Find someone to use as a suitable sanity check on finances – a mortgage professional, trusted friend, or both.

Finally, keep your credit score high by making all payments on time and not taking on excessive total debt.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/MartinBarraud

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Inventory of Homes for Sale Hits Record Low

Inventory of homes for sale hit record low.Are you ready to enter the home-buying market? Recent statistics suggest that you will need superior planning, plenty of cash, and more than a little luck.

According to the National Association of Realtors (NAR), the inventory of available homes (new and existing) fell to 1.48 million at the end of 2017, the lowest level on record. In February 2018, there was only a 3.4-month supply of existing homes available – well below the desired 6-month mark.

New homes are not expected to fill the gap in demand. Approximately 1.3 million new homes are required just to keep up with normal population growth. NAR predicts that only 900,000 will be built in 2018.

Why So Low?

Why are new home starts so low? The housing crisis drove many builders out of business, and those who remain are being careful about the homes they choose to build.

The National Association of Home Builders (NAHB) claimed 240,000 members in 2007, before the recession took effect. Approximately 140,000 members remain.

The surviving builders are focusing on higher-end homes to reach a decent profit margin. Increasing land prices, high regulatory costs, and labor shortages have forced builders to mostly abandon the starter home market, where the need is the most critical.

Fewer Construction Workers

According to the construction data startup BuildZoom, there are 100,000 fewer construction workers as of 2016 than there were in 2010, when the housing market was hitting bottom. NAHB estimates that regulatory costs have added an average $85,000 to the cost of a home between 2011 and 2016. Neither situation is likely to improve anytime soon

High demand and short supply are predictably driving up home prices. In 2017, the Case-Shiller National Home Price Index shot up 6.3% – approximately three times the inflation rate and twice the income growth rate over the same time period.

In essence, plenty of homes are available for people who can’t afford them. Those who can afford homes often find themselves in bidding wars.

Keep Renting

First-time homebuyers who were already struggling to find affordable homes are falling further behind and may have to settle for renting in the short term.

Prospective homebuyers, especially first-timers, must accurately assess what they can afford. Jordan Goodman, the personal finance expert and author known as “America’s Money Answers Man,” notes that people often don’t think about having to actively bid for a house. They overspend on emotion without considering their practical limits.

“You have to go in there knowing the maximum that you can spend for your budget,” says Goodman. “Do not get sucked into a bidding war … get something you can afford and know in advance what that maximum is going to be.”

Prepare for Bidding

Homebuyers may have to target homes in the price range below their expected budget, in anticipation that they may have to spend more than the original asking price.

As you set your upper limit for a home purchase, don’t forget about other associated expenses. Greg McBride, chief financial analyst for Bankrate.com, reminds us that beyond down payments and closing costs, “you have moving expenses, and then you’re going to want to furnish it … all of that costs money. You need to be able to do all of that without wiping out your emergency savings.” If you have no emergency savings, address that before you start.

Establish proper fiscal discipline before you even try to enter the housing market. As McBride notes, “If you haven’t figured out how to save money before you buy a house, you’re not going to figure it out after you buy a house.”

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/gerenme

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Over 50% of Homeowners To Spend on Home Improvements in 2018

Home Improvements in 2018 -- more than 50% of homeowners plan this spendingAre you ready to tackle a home improvement project this year? If so, you have plenty of company. According to the latest LightStream Home Improvement Survey, 58% of Americans are ready to pour money into home improvement projects in 2018.

The percentage of homeowners planning projects is close to 2017’s 59% value, but homeowners are willing to spend more per project in 2018.

Approximately 45% of respondents plan to spend $5,000 or more on their projects, the highest percentage in the survey’s five-year lifetime.

Larger home projects are booming, as the percentage of homeowners planning to spend over $35,000 doubled from 2017.

Staying in Homes Longer

“From millennials to seniors, every age group is planning projects to stay in their homes longer,” said LightStream Senior Vice President of Strategic Partnerships Todd Nelson. “In fact, only seven percent of people are remodeling to put their homes up for sale. That’s the smallest number we’ve seen since we started the survey.”

The survey results suggest that economic optimism appears to be taking hold, and the recent Tax Cuts and Jobs Act has factored into that optimism for some homeowners.

One quarter of respondents that had created a budget for their renovations altered that budget due to tax reform, with 18% increasing their budget.

Most Popular Renovations

What’s the most popular area of the home to be renovated? Outdoor projects take the overall prize, with 43% planning deck, patio or landscaping renovations and another 5% renovating pools. Bathroom and kitchen remodels are close behind at 31% and 26% respectively.

While home improvement spending may be on the increase, labor costs may not rise proportionately. According to the survey results, the do-it-yourself impulse is strong.

Just under two thirds of respondents plan to do at least some of their own project work, and 35% plan to handle the entire project on their own. Millennials (ages 18-34) lead the do-it-yourself charge with 70% expecting to tackle some portion of the project work themselves.

How They’re Funding Projects

A significant majority of renovators (62%) plan to pay for at least part of their home renovation with savings. Credit cards will be used by 30% of homeowners to finance renovation projects, while 13% expect to use a home equity line of credit (HELOC) and 9% plan to take out a home improvement loan.

Because of the relatively high interest rates on credit cards, it’s best to avoid them for funding all but small projects that you can pay off at the end of each month. A HELOC or home improvement loan may be a better choice if you have to borrow.

Home improvement loans are well suited for large projects with detailed milestones that the lender can review and approve. A HELOC is a more flexible line of credit that you can use as needed without having to supply the lender any details on the specific project.

Should You HELOC?

Which is better for you? A HELOC is a popular choice if you have significant equity in your home, but there are other factors to consider.

Greg McBride, chief financial analyst from Bankrate.com, reminds us that with a HELOC, “because you’re securing the loan with the equity that you have in your home, you’re getting a lower interest rate.”

The trade-off for that security is that your home is vulnerable should you default on the HELOC. Defaulting on an unsecured home improvement loan will harm your credit, but it won’t cost you your home.

Ask Your Lender

Ask your lender for details on your specific lending options in order to make the best decision.

If you are planning a home project in 2018, we wish you good luck. Remember that all projects require planning and forethought to avoid mission creep and cost overruns.

Stay focused, stay within your budget, and know when to call in the professionals. If you don’t know which breaker to turn off, where the sewer line is buried, or where the gas shutoff is, prepare to take out your wallet.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/andresr

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5 Ways to Finance a Remodel

Finance a Remodel
Dreaming of that big remodel but now sure how to finance it?  This is one of the most common questions that people ask when planning to make additions to their homes. Over the years, the cost of construction materials has skyrocketed, and most people cannot afford to hire a contractor. As a result, most people opt to carry out most renovations themselves to save money for other equally important obligations.

One of the concerns of a DIY project is that you might end up incurring additional expenses if some of the tasks are not done correctly. For example, wrong electrical wiring can result in a fire. Therefore, it is recommended to hire a professional who has the skills and expertise that is needed instead of trying to do the project yourself.

Financial institutions have stepped in to assist homeowners to carry our remodeling projects by providing home improvement loans. Just like other financial products, you will be required to repay the loan on time and stick to the set terms and conditions.

Here is a brief overview of five ways on how to finance a remodel in the current economy.

Start Saving for the Project

One of the easiest ways of avoiding taking a home improvement loan is by saving money for the project. The amount of time that it will take you get all the capital is dependent on the cost of the project. Request for estimates from contractors to get an idea of the total cost then determine the amount of money that you will be set aside for the project.

For example, if the project will cost $40,000, you can decide to start depositing $5,000 per month into a savings account. Ultimately, the amount of money that you save should be reasonable, and so you need to consider other factors such as your monthly income and expenses. You may have to forego some things to make your dream a reality. Go an extra mile and install a personal savings mobile application to keep track of your savings. The app will also motivate you to keep on keeping on even when you feel like giving up.

Take a Personal Loan

A personal loan is an ideal choice if you are making minor renovations such as replacing the bathroom floor or installing solar panels. Most financial institution caps all personal loans at around $30,000. Since terms and conditions that govern this kind of loans vary from one institution to another, it is recommended to get in touch with the respective customer care team to make the right decision. Even as you do so, it is important to note that the interest rates on personal loans are usually higher than on home equity loans due to the risks associated with them.

Credit Cards

Credit cards are an ideal choice for small home renovation projects that do not require a considerable amount of money. Just like the personal loans, the interest rates are usually higher than on mortgages since they are not secured. However, the extra interest rate may be less than the typical home improvement loan establishment fees.

Home Equity Loan

This is one of the most preferred and common ways that homeowners borrow money from banks and private lenders for remodeling projects. Simply put, it entails borrowing a specific amount of money against the current value of the house. That is, the present value of the home is used as collateral for the loan.

Note that you cannot borrow an amount that is equivalent to the full value of your home. However, you can borrow up to 80% of its value if you own it outright and have a mortgage insurance policy. One of the concerns that you need to keep in mind is that the total cost of the renovation project may end up being higher than the home equity.

Get a Loan from Friends, Colleagues, or Family Members

You do not have to always head to the bank to get a home improvement loan, friends, colleagues, and family members can lend you money to support the renovations. They will most likely be willing to offer you the money if you are an honest person who always keeps his word. Make sure that you repay the loan on time to boost your credibility and the chances of the same persons lending you money in the future.

Conclusion

Indeed, there are many viable ways on how to finance a remodel; you just need to identify one that best suits your needs and financial capability. One of the factors that the banks will consider when evaluating your loan application is your credit score. Make sure that you repay debts and pay bills on time to improve your credit history and score. Ordinarily, people who have a good credit score stand a better chance of getting a loan than those with a low score.

Photo: Benjamin Chan