If you’re thinking about purchasing a home but you’re not really happy about the current mortgage rates, you’re not alone. According to Freddie Mac, home sales have slowed due to the 30-year fixed mortgage rate staying above 6.5% since May.
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Since the end of 2021, mortgage rates have made quite a leap. For example 30-year fixed-rate mortgages have increased from 3% to over 7.5% and 15-year fixed-rate mortgages have jumped from 2.3% to more than 6.7%. Even so, Dave Ramsey says the increase in mortgage rates shouldn’t deter you from shopping from a home.
Here’s why you shouldn’t wait for mortgage rates to go down to buy a house.
Why You Shouldn’t Wait for Mortgage Rates To Go Down
According to Ramsey’s blog, even though mortgage interest rates are high right now, if you’re financially ready to do so, you should go ahead and buy a house.
“Mortgage interest rates are high right now,” Ramsey said, “but we don’t know for sure whether they’ll go back down anytime soon — they may even keep going up if the Federal Reserve decides to raise the federal funds rate again.”
Ramsey also wrote that, no matter what, housing prices will keep increasing, as is normal, and the best course of action is to buy now and lock in your home’s price. Once interest rates decrease in a year or two, he wrote, you can refinance to a lower rate.
Additionally, Ramsey pointed out that because interest rates are high right now, fewer people are buying homes, which means you won’t have as much competition when you make offers.
Also: Grant Cardone Reveals 6 Cities He Would Buy Investment Property in Right Now (and Where He Would Avoid)
What If You Wait Until Mortgage Rates Go Down?
Matt Ricci, a home loan specialist with national lender Churchill Mortgage, said it’s reasonable to expect lower interest rates in the next 18-24 months.
“The United States will be in an election cycle,” he said, “so the economic climate will most likely favor lower interest rates.”
However, don’t get too excited. According to Ramsey, the drop in interest rates likely won’t be enough to make a significant difference.
“But even if mortgage rates do go down in 2024, odds are the drop won’t be drastic — it’s not like rates are going to quickly return to the 2% to 3% range we saw at the end of 2021,” Ramsey wrote. “The bottom’s not about to fall out here.
“For example, even though the National Association of Realtors believes rates will go down in 2024, they’re only predicting a half-percent drop — from 6.5% to 6% — by the end of the year. A lower rate is definitely nice, but that small of a drop isn’t worth waiting around for.”
Besides that, there are other issues to consider if you wait until mortgage rates decrease.
“While lower interest rates would certainly favor additional inventory,” Ricci said, “the ratio of renters in the market compared to homeowners — in combination with a major gap in new construction — will still favor a larger demand for housing than supply of housing for sale.”
Ricci also said that when rates come down, home prices could increase. “So, while you certainly would have a lower rate on a mortgage, you would also be spending and borrowing more.”
Are You Financially Ready To Buy a House?
Before you start the homebuying process, Ramsey recommends you check the following four boxes. If you can’t check all four, he recommends waiting until you can.
You don’t have any consumer debt. This includes student loans, credit card payments or car notes. This will ensure that you have more room in your budget.
You have at 3-6 months’ worth of typical expenses saved. Unexpected expenses happen and having a solid emergency fund will allow you to pay for them without using your credit cards or dipping into your retirement accounts.
You’ve saved a substantial down payment. If you’re a first-time homebuyer, you’ll need at least 5% to 10%, Ramsey wrote. Additionally, putting 20% down can allow you to forgo mandatory private mortgage insurance, which could save you hundreds of dollars per month.
You can afford the house payment. Your house payment, including principal, interest, homeowners insurance and HOA fees should not equal more than 25% of your take-home pay, according to Ramsey. If it is, you risk not being able to meet your other financial goals.
Ensuring you are financially ready to buy a house will help you avoid your home being a financial burden that you might regret.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: Why You Shouldn’t Wait for Mortgage Rates To Go Down To Buy a House
When most people think about what it’ll be like to buy their first home, they think about their ideal floor plan or how they want to decorate their home. But before you can even get to that point, you need to make it through the underwriting process.
During the underwriting process, your mortgage lender evaluates whether you’re a good candidate for a mortgage. Going through underwriting may sound intimidating, but knowing what to expect can make the entire process run more smoothly.
What is mortgage underwriting?
Mortgage underwriting is simply a method used by your lender to assess your eligibility for a mortgage loan. This evaluation is performed by reviewing your credit, conducting a comprehensive analysis of your finances, and appraising the property.
After this, the lender will determine if you’re a suitable candidate for the loan. The majority of this process occurs discreetly, but your participation is vital.
As the borrower, it’s your responsibility to furnish your lender with all the financial information they require. By being transparent and forthcoming with information, you facilitate the lender’s decision-making process and increase the chances of approval for your mortgage application.
What does a mortgage underwriter do?
A mortgage underwriter’s role is to evaluate risk and assess if you’re a suitable candidate for a mortgage loan. They analyze your financial information to determine the likelihood of you defaulting on your mortgage payments.
The underwriter focuses on four key areas in their assessment: credit, assets, income, and the home appraisal. Let’s take a look at what they consider in each area:
Credit: Your credit score is a major factor in the underwriting process. A high credit score indicates a strong track record of repaying debt and could increase your chances of getting approved for a mortgage. To qualify for a mortgage, you must have a minimum credit score of 620, but to secure the best interest rates, you should aim for a score of 740 or higher.
Income: Your lender will want to see evidence of a stable source of income to ensure that you can make your monthly mortgage payments. You can verify your income by providing W-2s, bank statements, tax returns, and if self-employed, business tax returns and profit and loss statements.
Assets: To mitigate the risk of default, your lender will consider all your assets, which can act as collateral. Relevant assets include savings, retirement accounts, stocks, and investment properties. A substantial number of assets also shows the lender that you have the means to cover your down payment and closing costs.
Appraisal: Before finalizing the mortgage, the lender will perform an appraisal of the property to ensure that you’re not overpaying. An appraisal protects both you and the lender by providing a fair assessment of the home’s value.
5 Steps of the Mortgage Underwriting Process
The underwriting process can feel pretty overwhelming when you’re in the beginning stages. Here is an overview of the five steps you’ll need to take to purchase your home.
1. Get preapproved for a mortgage
The first step in the home buying journey is securing preapproval for a mortgage. This crucial step should be taken before starting the search for a house. The preapproval process involves an evaluation of your financial information and a credit check by your lender.
Documents like bank statements, tax returns, and employment verification must be submitted to the lender. Upon preapproval, your lender will issue a letter indicating the amount you have been approved to borrow.
Getting preapproved is important as it gives a clear picture of your budget for the home purchase. Additionally, having a preapproval letter enhances the credibility of your offer and makes you a stronger candidate in the eyes of listing agents and sellers.
2. Get your home appraised
With preapproval for your mortgage in hand, it’s time to start your search for your dream home. Once you’ve found it, a home appraisal is the next step.
A professional appraiser will assess the value of the property based on its location, neighborhood, and features, ensuring that you don’t end up borrowing more than the home’s actual worth.
3. Perform a title search
Before purchasing a home, it’s essential to check for any existing claims, unpaid taxes, or liens. After the appraisal of the property, the title company will conduct a thorough search to ensure its clear legal standing.
Upon confirming that the property is free from any legal disputes, the title company will secure a title insurance policy. This insurance provides protection for the lender and verifies the home’s eligibility for purchase.
4. Find out whether you’ve been approved for a mortgage
Once your mortgage loan application has gone through underwriting, you’ll find out if you’ve been approved for a mortgage. Hopefully, your application is approved, and you’ll be all set to close on your home.
However, you could receive one of the following three decisions:
Approved with conditions: Your mortgage application may be approved on the condition that you provide additional information. For instance, you may need to provide more financial documents or further proof of employment.
Denied: The lender may reject your loan application. If this happens, you want to understand why so you can figure out your next steps. For instance, you might have been turned down because your debt-to-income ratio is too high. Or your credit score may have been too low. Knowing this information gives you tangible steps you can take to improve your finances and reapply in the future.
Suspended: Your loan application may get suspended if something is missing from your file. If this happens, the lender will let you know what information they need to continue the underwriting process.
5. Close on your home
Once your lender has cleared any loan contingencies and locked in your interest rate, you’re free to close on your home. Once you’ve closed on the mortgage and received the keys to your new home, the loan process is finished.
How long does the underwriting process take?
There really is no standard time frame to complete the underwriting process; it can take from a few days to a few weeks. The length of time depends on the type of home loan you’re applying for and any issues that arise along the way.
A lot of this will be outside your control, but there are steps you can take to make the experience easier. The best thing you can do is to respond quickly to any requests from your lender.
For instance, if they contact you and request additional bank statements, then try to provide that information as quickly as possible. The underwriting process cannot proceed without this documentation.
What can I do to ensure a smooth underwriting process?
To prepare for the mortgage underwriting process, it’s essential to compile all the required documents and verify the accuracy of your credit report. Additionally, ensure your income and work history are recent and correct and follow these guidelines:
Manage your debt level: Avoid incurring new debt or making significant financial changes that may impact your debt-to-income ratio during the loan processing period.
Stay connected with your lender: Respond promptly to any questions or requests for additional information during the underwriting process. Utilize online resources to stay organized and easily communicate with your mortgage loan officer.
Be transparent about your finances: Provide accurate and complete information about your income, credit history, and assets. If there are any discrepancies, include explanations for them to help the underwriter make a faster decision.
By keeping these tips in mind, you can make the mortgage underwriting process easier and increase your chances of becoming a homeowner.
Bottom Line
During the mortgage underwriting process, your lender assesses your financial information and decides whether you meet the criteria for a loan. For first-time homebuyers, this stage can be overwhelming, but there are steps you can take to simplify the process.
Take the time to carefully compare and choose your lender, opting for one that is willing to support you and provide you with the best terms possible. Additionally, collaborating with a well-informed real estate agent can make the journey smoother.
Don’t be discouraged if your credit score is lower than you’d like. There are many mortgage programs available that are designed to assist borrowers with bad credit. With these options, buying your first home can still be a possibility.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Disclosure regarding our editorial content standards.
The credit score was invented in 1989 to make credit reports more actionable for lenders.
Credit scores affect many parts our lives: whether we qualify for a loan, what interest rate we pay, even where we can rent or whether we get our dream job. But that three-digit number is a relatively new invention—the credit score was invented in 1989, less than 50 years ago.
Understanding the origins of the credit score can help you better comprehend why lenders use it and how to improve your financial situation.
When Credit Scores Were Invented
People have borrowed and lent money for centuries. In the early days, storekeepers and lenders only extended credit to people they knew, or they would ask people they respected in town for their views on a person’s credit risk. This informal credit reporting system was highly localized and incredibly subjective.
But as credit became more critical to daily life and people began to move around more, the need for a more widespread credit reporting method arose.
The 1800s: The Rise of Credit Reporting Agencies
After the Panic of 1837 (partly caused by easy access to credit), Lewis Tappan recognized that businesses might benefit from a better understanding of who to issue credit to. In 1841, he formed Tappan’s Mercantile Agency, the first credit reporting agency in America, to meet this need.
His company hired “correspondents,” reliable men (often attorneys and ministers) who would investigate people’s standing in their communities and report it to the central office. They would then add the information to a central ledger in New York City. Many businesses subscribed to the Mercantile Agency to view these reports before issuing credit.
Tappan was a strict abolitionist, so he only worked with businesses in free states, so other credit reporting agencies began to spring up to work with businesses in the South. Hundreds of these credit reporting agencies existed all over the country by the end of the Civil War, but the system had a few problems:
Each agency had different information based on who they hired as correspondents.
Information was highly subjective and included information about a person’s race, gender, and overall moral character, which allowed bias to play a role in lending decisions.
Lenders didn’t know how to interpret the information in the credit reports because they were so subjective, and lenders often didn’t know the person applying for credit.
As more people began to access credit to purchase items like cars and homes in the late 1880s and early 1900s, these credit reporting agencies continued to thrive.
1950s and 1960s: Digitizing Credit Reports
This system was still in place in the 1950s when the ability to digitize records meant that some standardization could occur. Larger agencies started buying their smaller counterparts for additional data they could add to their reports, and national credit bureaus began to form.
In 1956, Bill Fair and Earl Isaac created Fair, Isaac, and Company to make credit reports more actionable for lenders. They used the data in a credit report to perform a statistical analysis that would inform a lender of a person’s credit risk. What resulted was a more analytical approach to interpreting credit reports, but each business or lender had its own algorithm based on the factors they prioritized.
As records continued to be digitized, many people became concerned about the surveillance being done to gather credit information and discriminatory practices in credit reporting. People also realized that credit mistakes would be available forever and could potentially hurt people’s ability to borrow for their entire lifetimes. The Fair Credit Reporting Act of 1970 put several protections into place, including:
Removing data related to race, sexuality, and disability from credit reports
Requiring credit reporting agencies to delete information after seven to 10 years, depending on the type of data
1989: The FICO Credit Score
While more effective for lenders than the previous system, scores varied widely based on a company’s priorities.
The credit reporting bureaus wanted something more standardized, so they partnered with Fair, Isaac, and Company (now known as FICO®) to create the FICO Score, a national scoring model for everyone. The FICO Score debuted in 1989 and quickly became popular with lenders, who no longer needed to hire companies to create their own algorithms. Consumers, who could now know their credit score before applying for a loan, also appreciated the FICO Score.
In the 1990s, the FICO Score cemented itself as part of the lending landscape when Fannie Mae and Freddie Mac began requiring the score as part of mortgage applications.
VantageScore and Other Credit Scores
In 2006, the three major credit reporting bureaus—Equifax®, Experian®, and TransUnion®—launched the VantageScore®, an alternative to the FICO score. There have been four iterations of the VantageScore since 2006, and the latest version incorporates trended credit data, which includes monthly data points over 24 months. It also utilizes machine learning and does not factor medical debt into its algorithms.
Each major credit reporting bureau also has its own proprietary scoring models that lenders may also consider:
Equifax Credit Score
Experian PLUS Score
TransUnion CreditVision New Account score
Despite these options, most top lenders use the FICO Score.
Why Credit Scores Were Invented
Before the credit score, lenders determined a person’s credit risk based on credit reports, which include:
Personal information
Account information
Hard inquiries into your credit
Public financial records such as liens or bankruptcies
Often, lenders weren’t sure how to interpret your credit report, which led to bias in lending decisions and general confusion for consumers regarding whether they would be approved for a loan when they applied.
The credit score was invented to standardize the lending process to make it faster and more equitable. It prevented lenders from using racial, gender, and class bias when determining someone’s credit risk.
Problems With Modern Credit Scoring
While credit scores eliminated the problems of previous credit reporting systems, they aren’t perfect. Here are a few issues with modern credit scoring:
Inappropriate use of credit scores. When the credit score was originally invented, its sole purpose was to determine credit risk for loans. Now, lenders, landlords, and employers often use it to determine a person’s level of responsibility, which can influence car insurance rates and hiring decisions.
Upholding social hierarchies: People with low credit scores, or the roughly 10% of Americans with no credit history, are often denied access to loans or credit cards. When they receive a loan, they often have to make a larger down payment and pay more in interest.
Racial disparities: While the Fair Credit Reporting Act of 1970 removed the use of race as an explicit factor in one’s credit, institutional racism may still impact the remaining factors. For example, redlining continues to prohibit many Black Americans from purchasing a home, preventing them from building wealth through homeownership. As a result, their credit length and payment history, two factors that impact your credit score, may be shorter. This may explain why multiple studies have shown that racial minorities have lower credit scores than white people.
Inaccurate information: A recent study found that 34% of people have at least one error on their credit report. These errors can lower your credit score, resulting in you paying more in interest. While you can dispute errors on your credit report, it may take time to see an increase in your credit score.
These problems could result in you paying more in interest for a loan or being denied the loan altogether.
The Future of Credit Scores
Credit scores have changed since they were invented and will continue to do so as consumer spending and technology change. Here are a few trends that may impact how credit bureaus determine your credit score in the near future:
Buy Now, Pay Later (BNPL): Also called point-of-sale (POS) installment loans, BNPL plans allow you to divide purchases into lower monthly payments, often without interest. Currently, these short-term loans aren’t reported to a credit bureau unless you don’t make your payments, but that may change as technology advances to allow real-time data and these become more popular with consumers.
AI and Machine Learning: Experts are currently debating the use of AI and machine learning to automate and improve credit scoring. Some parties claim it will result in more accurate credit risk assessments and allow credit reporting to occur in real time, making it more accurate. Others are concerned about the potential invasion of privacy and the ethical use of data since AI is only as good as the data it is fed.
Inclusion of alternative data: Nearly 37 million Americans are credit underserved, meaning they have little to no credit history. As a result, they are unable to get access to credit. To help the credit invisible gain credit, credit reporting companies have begun considering alternative data, called consumer-permissioned data, including bank account information and monthly payments like rent, utilities, and streaming subscriptions. Currently, consumers can choose to share this information with lenders and then retract access once they’ve built credit, but this information could begin factoring into everyone’s credit score since AI can make this data easier to use.
Track Your Credit Score With Credit.com
Your credit score is one of the most important numbers in your life. Understanding the history of the credit score and its challenges can help you in your journey to improve your credit. As technology continues to advance, stay informed on the latest updates to credit scoring and take proactive steps to manage your credit with Credit.com.
Rent prices are on the rise, with the average cost increasing 18% between 2017 and 2022. But buying a home requires a hefty down payment and good credit. Renting to own your home can give you the best of both worlds, but there are some downsides.
If you’re thinking about signing a rent-to-own agreement, it’s important to weigh the pros/cons of rent-to-own home deals. Here’s what you need to know before you sign on the dotted line.
What are rent-to-own homes?
When you own a home, part of your monthly payments goes toward paying off the principal. If you stay in the home long enough, you’ll own it.
The same doesn’t apply to rentals. Your monthly rent solely covers your costs of living in that home, whether it’s a condo, apartment, townhouse, or single-family house.
A rent-to-own home lets you pay rent to live on the property, with the option to buy it when the lease runs out. In some cases, a portion of your rent goes toward the purchase price, but that isn’t always the case.
How does rent-to-own work?
A rent-to-own agreement is essentially a lease agreement with an option to buy. Rent-to-own contracts should be read thoroughly. Those options can vary from one contract to another.
When you sign a rent-to-own contract, you pay an upfront fee called an option fee. This is typically 1 to 5% of the home’s purchase price, and it’s non-refundable.
It’s important to note that a lease does not relieve you of the requirements to buy a house. You’ll still have to qualify for a mortgage and make a down payment. It’s merely a way to buy yourself some time and possibly put some of your rent toward the purchase price of a home.
Lease Option vs. Lease Purchase
Before you sign, pay close attention to the lease agreement you’re signing. There are two types, and one contractually obligates you to buy the property.
Lease Option Agreement
A lease option agreement is the best deal of the two for you, the buyer. You’re signing a lease option contract that merely gives you first rights to the house when the lease is up. If you change your mind, find a better deal, or can’t qualify for a mortgage, you can find somewhere else to live and move your belongings out.
Since the option fee is nonrefundable, it’s important to note that you will lose money if you choose not to buy. Calculate this loss when you’re deciding whether to buy.
Lease Purchase Agreement
Unlike a lease option agreement, lease purchase agreements obligate you to buy at the end of the lease. Since it’s a contract, that means you’re legally obligated to purchase the house.
This can be risky for a couple of reasons. Once you’re in the house, you may see issues you didn’t notice when you were first touring the house. Things could change with the neighborhood or your circumstances that you couldn’t know at the outset.
But the biggest issue with a lease purchase contract could simply be that you aren’t eligible for a mortgage to buy the house. Make sure you know, up front, what penalties or liabilities you’ll face if you can’t buy the house when your lease is up.
Even though both agreements operate differently on your end, they do obligate the seller to give you the option to buy when your lease expires. This puts you in a position to own a home at a predetermined future date, giving you the opportunity to start planning.
Length of a Rent-to-Own Agreement
Rent-to-own contracts start with a lease period that can be up to five years but is usually less than three. The thought is that the rental period will give a renter time to qualify for a mortgage. During this time, you’ll work on building your credit, if necessary, and saving for a down payment.
In some cases, a rent-to-own arrangement could have renewal terms. That means if you reach the end of the lease and want more time, you can extend the lease. With this option, though, the property owner could increase your monthly rent or the purchase price.
Preparing for Homebuying
During your lease term, you’ll make each monthly rent payment in exchange for remaining in the house. But it’s important during that time that you work toward purchasing the house when your time is up. Here are some things to do to boost your chances of landing a mortgage once your lease expires.
Boost Your Credit Score
Your rent-to-own deal requires that you qualify for a mortgage once the term is up. To do this, you will need to meet the minimum credit score requirements. You can get a free copy of your credit report each year at AnnualCreditReport.com, but there are also credit monitoring services that can help you stay on top of things.
Although requirements can vary from one lender to the next, Experian cites the following credit scores as necessary to land a mortgage:
FHA: If you qualify, a Federal Housing Association loan will accept credit scores as low as 500.
USDA loans: Those who meet the requirements can qualify with a score as low as 580.
Conventional loan: Generally 620 or higher, but some lenders require 660 at minimum.
VA loans: Eligible military community members and their families can obtain loans with scores as low as 620.
Jumbo loan: These loans cover houses at a higher price, so you’ll need a score of at least 700.
Save for a Down Payment
In addition to a good credit score, you’ll need to put some money down on your new home. Down payment requirements vary by loan type, but it’s recommended that you put at least 20% down. That means if you’re buying a $200,000 home, you’ll need at least $40,000 by closing.
There are lower down payment options, but if you choose those, your mortgage payments will include something called private mortgage insurance. This will increase your monthly payment by $30 to $70 per $100,000 borrowed.
If you can’t save up 20%, you may qualify for an FHA loan, which requires as little as 3.5% down. Both VA and USDA loans have zero down payment options, and there are programs offering down payment assistance to those who qualify.
The best part about rent-to-own properties, though, is that some come with rent credits. With a rent credit, a percentage of your rent will go toward your required down payment. Calculate in advance how much you’ll have in that escrow account at the end of your lease to make sure you save enough to supplement it.
What are the pros of rent-to-own?
Rent-to-own homes can be a great option, especially during a tight housing market. If there’s a house you want to buy, but you can’t make a down payment or your credit isn’t where it should be, it could be a great workaround. Here are some of the biggest benefits of rent-to-own agreements.
Rent May Go Toward Purchase Price
Depending on the terms of the rental agreement, renting to own could help you work toward paying for the home. Instead of the full amount of your rent being pocketed by a landlord, a percentage of your rent could go toward the eventual purchase price. Before signing, pay attention to rent credits and try to negotiate the best deal possible.
The Purchase Price Is Locked In
When a landlord agrees to a lease option, the home’s purchase price is written into the contract. That price will typically be higher than what the market says it’s currently worth. This means if the U.S. housing market sees an unexpected increase, you’ll be buying the home for less than its value. Even if the market dips, once you purchase the house and remain there for a few years, you may be able to sell it at a profit.
You’ll Buy Extra Time
For many renters, the rent-to-own period provides time to qualify for a mortgage. If you’ve researched all the options and found you’re close but not quite there yet, a rental period could be just what you need.
Before you choose this option, though, take a look at your circumstances. If substantial existing debt and poor credit mean you won’t qualify, you may need more than the few years you’ll get with a rent-to-own agreement.
No Moving Necessary
Let’s face it. Moving can be a pain. You have to pack everything up, line up a moving truck and get help moving, and unpack your items once you’re in the new location.
With a rent-to-own agreement in place, you skip the hassle of moving. You’ve already been in that home, making monthly rent payments, for at least a couple of years. You’ll simply go through the closing process and switch from rent payments to mortgage payments.
What are the cons of rent-to-own?
If you can get a mortgage, that’s always going to be a better option than renting or leasing to own. But there are some instances where renting without the buy option could be better for you. Here are some things to consider.
Rent-to-Own Home Maintenance
Before you sign any lease agreement, it’s important to read the fine print. One thing to note, specific to own agreements, is who will be responsible for maintenance during the rent-to-own period. If you rent without the promise of eventual ownership, your landlord will take care of those costs. In some cases, rent-to-own agreements require the renter to handle all repairs.
But there’s an upside to handling repairs on your own. To your landlord, the property is technically yours. That means you likely will give it more TLC. Still, it’s well worth it to pay for a home inspection before you agree to a rent-to-own agreement. This will identify any serious issues that will need to be addressed before you buy.
Option Fee
One distinguishing feature of a rent-to-own property is the option fee. This is usually between 1 and 5% of the purchase price and is non-refundable. That means if you don’t ultimately qualify for a mortgage, you’ll lose that money.
Home Values Could Drop
Property values aren’t guaranteed. Your landlord estimates the value of the property, but if you’re in a rising market, you might get that home at a steal. While that’s good news for you, the reverse can happen. If housing prices drop substantially during that time frame, you could find yourself buying a property for more than it’s worth.
Contract Breaches Can Be Costly
Rental agreements are a legal obligation. If you don’t pay your rent, your landlord can evict you and keep your security deposit. But rent-to-own contracts bring an additional level of risk. Missed payments mean you could be evicted and lose all the money you’ve put in. That includes the upfront fee and any rent credit you’ve earned.
All that money will also be lost if you can’t qualify for a mortgage when your rental time is up. These agreements can give you some breathing room. However, if your low credit scores, income, lack of a down payment, or employment situation make you ineligible for a mortgage, you could be searching for another rental while losing everything you’ve paid on the lease-to-own home.
Steps to Buy a Rent-to-Own Home
Once you’ve decided renting to own is the route you want to take, you may wonder what to do next. The following steps can help you ensure you get the best deal in a rent-to-own agreement.
1. Find a Home
This is more challenging than it might sound, especially if you’re looking in a competitive real estate market. Rent-to-own homes are extremely rare, so you may have to find a home for sale and try to negotiate this type of setup.
Typically, homeowners become renters when they can’t sell their homes. This means your rent-to-own contract might be on a home that’s in a less desirable or convenient area of town. For someone whose home has been on the market for a while, being able to collect rent money with the promise of a sale in a few years can be a huge relief.
For best results, find a real estate agent who can help you track down a home and negotiate with the seller. The National Association of REALTORS® maintains a directory of real estate agents, but you can also ask for a referral or find real estate agents nearby who have brokered these types of deals recently.
2. Research the Home
Even if it’s tough to find a lease-to-own home in your area, don’t snatch up the first one you find. Crunch the numbers to make sure the rent and purchase price make financial sense for you. Look at the sale history of the home to verify that the owner’s estimated purchase price is somewhat within what the median home price will likely be when your lease expires.
3. Research the Seller
The seller needs to be looked into as well. This is even more important with rent-to-own agreements since this person will be your landlord for the entire lease period. If you see any red flags during your interactions with the seller, move on.
4. Choose the Right Terms
Before you make a real estate purchase, you would have a closing attorney review the documents. The same goes for a rent-to-own agreement. Run all the paperwork past a real estate attorney to make sure there’s nothing in the contract that will hurt you in the long run.
Your real estate agent should be able to negotiate the best terms for you, including how each rent credit will help you build equity and what happens at the end of the lease.
5. Get a Property Inspection
Any time you make a home purchase, it’s essential to know what you’re buying. The same is true for rent-to-own properties. A home inspector can check things out and make sure you aren’t purchasing a home with serious issues.
6. Start Preparing to Buy
Once you start making rent payments, it’s time to start preparing for your eventual home purchase. Chances are, you’ll have to make a sizable down payment on a home loan, so plan to have that ready. Also, keep an eye on your score with all three credit bureaus and make sure you’ll qualify.
A rent-to-own contract can be a good deal for both the buyer and the seller. It can give you time to save money and improve your credit score. A real estate lawyer should take a look at your contracts and make sure your best interests are protected.
Bottom Line
Rent-to-own homes present a unique option for potential homeowners. This approach offers the opportunity to enter the homeownership arena at a slower pace, allowing individuals to build credit, save for a down payment, and experience living in the home before making a final purchase decision.
However, the rent-to-own path isn’t free from drawbacks. Potential buyers should be wary of unfavorable terms, higher monthly payments, and the risk of losing money if they decide not to buy. Ultimately, like all significant decisions in life, choosing a rent-to-own option requires careful consideration and thorough research.
Frequently Asked Questions
Where can I find rent-to-own houses?
Rent-to-own houses can be found through specialized websites dedicated to these types of listings, local real estate agents familiar with the concept, or sometimes through classified advertisements in local newspapers or online platforms.
Can I find rent-to-own homes on Zillow?
Yes, Zillow does list rent-to-own homes. When searching for properties, you can filter the search results to show only rent-to-own options. However, availability may vary based on the region and market conditions.
How long is the typical rent-to-own contract?
The typical lease term ranges from one to five years, but terms can vary based on the agreement between the homeowner and tenant.
Do I have to buy the house at the end of the lease?
No, the decision to buy is optional. However, if you decide not to purchase, you may lose any upfront fees or additional monthly amounts set aside for the potential purchase.
Can the seller change the purchase price once set?
Generally, the purchase price is fixed in the initial agreement. However, some contracts may have clauses allowing price adjustments based on market conditions.
What happens if the property value decreases during the lease period?
If the home’s value decreases and you’ve agreed on a set purchase price, you could end up paying more than the current market value. It’s crucial to negotiate terms that protect your interests.
Who is responsible for repairs and maintenance?
The agreement should clearly outline these responsibilities. In most cases, the tenant bears the responsibility for maintenance and repairs during the lease term.
What’s the benefit of a rent-to-own agreement for sellers?
Sellers can generate rental income while waiting to sell, often at a premium. It also widens the pool of potential buyers, especially those who need time to improve their credit or save for a down payment.
How do property taxes work in a rent-to-own agreement?
In a rent-to-own scenario, the property taxes are typically the responsibility of the homeowner, as they still retain ownership of the property during the rental period. However, the specific arrangement can vary based on the terms of the agreement.
Some contracts may stipulate that the tenant pays the property taxes directly or reimburses the homeowner. It’s crucial for both parties to clearly understand and agree upon who will cover the property tax obligation before entering into a rent-to-own contract.
If I don’t buy, do I get a refund for the extra money paid?
Typically, the extra money paid above regular rent, often referred to as “rent premium,” is forfeited if you decide not to buy.
Is the rent in a rent-to-own agreement higher than usual?
Often, yes. A portion of the monthly rent may be used for the potential down payment or purchase price, making it higher than the average rent for similar properties.
What’s the difference between rent-to-own and mortgage?
Rent-to-own is an agreement where a tenant rents a property with the option to buy it at the end of the lease. No bank is involved initially, and the tenant isn’t obligated to buy. A mortgage, on the other hand, is a loan specifically for purchasing a property. The buyer borrows money from a bank or lender and agrees to pay it back with interest over a predetermined period.
Does rent-to-own hurt your credit?
A rent-to-own agreement, in itself, doesn’t usually affect your credit. However, if the homeowner reports late payments to credit bureaus, it could hurt your credit score. On the positive side, consistently paying on time and eventually securing a mortgage can benefit your credit.
What is another name for rent-to-own?
Rent-to-own agreements can go by various names, including:
Lease to purchase
Lease option
Rent-to-buy
Rent-to-purchase option
Lease purchase
Each of these terms represents the concept of renting a property with the potential option to buy it after a set period.
When you purchased your first home, it likely checked off all the boxes. But over time, perhaps your lifestyle has changed and your family has grown, and now you’ve started asking yourself, “Should I buy a bigger house?” Whether you’re looking for larger bedrooms, expanded family space or more storage solutions, buying a bigger home — or even just moving to a different layout or location — might be a change you’re ready to make.
Scott Bridges, Senior Managing Director of Consumer Direct Lending at Pennymac, says that upsizing happens frequently. He explains that a “healthy percentage of buyers are looking to buy up for space, neighborhood, school district and work proximity reasons. It’s a great pursuit and one of the more exciting chapters in one’s homeownership journey.”
Here’s how to figure out if you’ve outgrown your current home and how to determine how big a house you actually need.
The Signs You’ve Outgrown Your Home
While starting a new chapter in a bigger home may sound appealing, moving is a big decision that can come with a hefty price tag. How do you know if you’ve really outgrown your house? Bridges says the following are some of the most important items to consider.
Physical Aspects
One of the first things you’ll want to assess is the number of bedrooms and bathrooms you have versus the number you need. Bridges notes, “If your family is growing, if you have kids or parents moving in, you will need additional space for the new members of the household.”
Evolving household dynamics can also change your idea of an optimal home layout. If you currently have a one-story home, do you want to move to a two-story residence or vice versa? Do you want your children’s bedrooms on the same floor as yours? Do you need a separate entrance and living area for mom and dad or grandma and grandpa?
You’ll also want to think about your outdoor space. Bridges recommends asking yourself how much space you’ll need. For example, will you want to entertain, maybe have a pool, how much yard would you like to manage? All things to consider when looking to buy a bigger house.
Future Plans
Even if you’re comfortable in your home right now, do you foresee life events on the horizon that may lead to things getting cramped? Think carefully about your future plans and determine if they align with your current living environment. Consider the following:
Will you be having more children or expanding your family?
How long will your kids be living in the house before they leave for college or work?
Will you need a larger garage or driveway as your children get their driver’s licenses?
Do you envision an elderly parent moving in with you at some point?
Your answers to these questions will help you decide if moving to a bigger home is right for you.
Daily Life
Your home’s physical size may be the primary factor when deciding if you’ve outgrown it, but there are other lifestyle factors to consider as well. For example, do you have a short or a long commute from your current home? Bridges points out, “Most people don’t want to add significant time to their commute, even if it is for a larger home.” Others, however, may feel a longer commute is an adequate trade-off for increased space.
Or maybe you aren’t commuting as much because you work or attend school from home. Could a dedicated work area in a larger home reduce distractions?
Consider, too, the benefits and drawbacks of your present location. Even if you love your neighborhood, perhaps you want to move to a quiet, traffic-minimal cul-de-sac. Or maybe you’d like to be within walking distance of stores, restaurants or public transportation.
Quality of life is key. If your current home is causing you stress and not providing you the comfort you need, it may be time to upsize. Bridges urges, “Carefully think about how much better your day could potentially be with more space, a bigger kitchen, larger yard and more rooms.”
Considerations for Staying Put
There are many reasons why you may want or need to move to a bigger house. But that increase in square footage will likely increase your expenses and responsibilities. Here are a few reasons why staying put may be a better option for some homeowners.
Difficulty Finding a Home in Your Ideal Location
Depending on your desired location, a larger home in your price range may be difficult to find. If you want to remain in the same neighborhood or school district, you’ll have to decide whether moving away from your preferred area for a bigger space is worth the sacrifice.
Higher Costs Beyond the Mortgage
Even if you can comfortably afford your down payment and monthly mortgage payment, there are other expenses you’ll need to consider when moving to a bigger house. “If you live in an area with colder winters, understand your heating costs will go up,” Bridges says. “In a warmer climate, think Arizona and Texas in the summer, AC costs can run very high electric bills in bigger homes.”
Increased Responsibilities
A larger home requires more interior and exterior upkeep. There’s more to clean, furnish, repair, landscape and maintain, which takes time, money and energy.
Not a Guaranteed Investment
If you’re purchasing a home based on an anticipated greater return on investment, keep in mind that real estate values can be unpredictable. There’s no guarantee that your larger home will increase in value when you’re ready to sell.
Commute
Housing costs are often less the further you move away from city centers, giving you more bang for your real estate buck. But if it takes you longer to get to your job, the added time, hassles and transportation expenses may not be worth it. Bridges notes, “If you’re extending your commute to live in a bigger house in the suburbs, the drive may be just too hard.”
Financial Tips for Buying a Larger Home on a Budget
Moving involves a considerable amount of expense, stress and time. Many people try to avoid it by buying a home that will meet their needs for many years to come. However, it’s also important not to buy a house bigger than what you really need. Maintenance requirements, increased utility bills and expensive mortgage payments can be significant burdens. When purchasing a home, how can you be prepared for a growing family without overstretching your budget? Here are a few tips.
Anticipate Costs
Try your best to forecast the additional costs of a bigger home. “When you buy a larger home, you can easily anticipate your mortgage, taxes and insurance costs increasing, but many people don’t anticipate the additional costs of a larger home,” Bridges explains. “Your utilities will be more expensive, lawn and landscaping and amenities like pools will increase your monthly expenses as well. Lastly, repair costs can be much more expensive on bigger homes. Think of a roof replacement on a 2,000 square foot house versus a 4,000 square foot house.”
Consider Your Income and Employment Stability
While more space may support your plans, Bridges stresses that stability of income and employment must be part of the discussion when considering moving to a larger home. Your household income will need to cover the higher costs of owning a bigger house — now and in the days ahead.
Rent Out Your Original House for Income
It may make sense to sell your current home and use the proceeds for the down payment. But if you don’t have to do that, consider keeping it as a rental. Some homeowners move to a bigger home while renting out their old home, creating what can be a lucrative income stream in the future. Bridges advises, “Depending on how much you owe on your house, sometimes it makes sense to keep the original house and rent it out, as it can represent a good income source in the long run. Over time, real estate tends to appreciate and rents tend to rise, so holding the property as a rental can add to your overall wealth as the years go by.”
What to Look Out for When You’re Ready to Buy a Bigger House
Moving to a larger home is a significant change and takes careful thought. If you’re ready to upsize, think about how your prospective new home could adapt as your needs evolve. Bridges says that during the buying stage, homeowners with growing families often look for the following:
Bedrooms on the same floor
A bigger kitchen, a nursery or a media room
Backyard space for kids and pets
A better school district, which generally speaking, impacts home value stability
Want to start your new home search now? See how much your current home is worth, and then go beyond home affordability calculators to determine how much house you can actually afford.
Are You Ready to Move to a Larger Home?
So, should you move to a bigger home? “Every buyer has to make their own decision, as their circumstances vary,” Bridges says. Moving may be challenging, and selling is a process, but he adds, “At the end of the day, buying a bigger home might be one of the more memorable and enjoyable things you can do in your life, so don’t wait too long, if you can!”
Choosing a home that is the right size for your life today and tomorrow involves balancing both your family needs and your budget. If you’re ready to take the next step toward a larger home and are looking for expert guidance in the mortgage loan process, get a custom instant rate quote from Pennymac today.
WASHINGTON (September 14, 2023) – The current real estate market’s high home prices and mortgage rates, as well as limited inventory, are the top reasons that Realtors® and prospective home buyers across races and ethnicities cite as barriers to purchasing a home, according to two new reports from the National Association of Realtors®.
In partnership with Morning Consult, NAR’s 2023 Experiences & Barriers of Prospective Home Buyers Across Races/Ethnicities report surveyed White, Hispanic/Latino(a), Black and Asian prospective home buyers about their experiences. NAR’s 2023 Experiences & Barriers of Prospective Home Buyers: Member Study surveyed Realtors® who focus on residential real estate regarding the latest buyer with whom they worked who has not yet purchased a home, and it compares findings with the consumer study.
“Home buyers face the most difficult affordability conditions in nearly 40 years due to limited inventory and rising mortgage interest rates,” said Jessica Lautz, NAR’s deputy chief economist and vice president of research. “The impact is exacerbated among first-time buyers who are more likely to be from underrepresented segments of the population.”
Among prospective home buyers, Asian (27%), Hispanic (24%), Black (20%) and White (15%) respondents say the main reason they have not yet bought a home is because they are waiting for prices to drop. White respondents (15%) are just as likely to say it is because they are waiting for mortgage rates to drop. Additional market-related reasons that prospective home buyers cite as barriers include waiting for mortgage rates to decline (18% – 25% of all four groups) and not enough available homes within their budget (19% – 24% of all four groups).
The top three reasons why Realtors® say buyers have not yet purchased homes are the same as reported by consumers: not enough homes available for purchase in buyers’ budgets (34%), buyers are waiting for mortgage rates to drop as higher prices affect affordability (18%) and buyers are waiting for prices to drop (9%). These three factors greatly impact affordability since limited inventory drives up home prices and higher rates increase monthly mortgage payments.
Saving for a competitive home down payment is also a primary obstacle for prospective home buyers (6% – 9% of all four groups). In terms of what holds them back from saving for a sufficient down payment, prospective home buyers across races and ethnicities cite as barriers current rent/mortgage payments (43% – 56% of all four groups) and credit card payments (38% – 57% of all four groups). Despite this, awareness about existing down payment assistance programs is low among prospective buyers saving for down payments. Only 8% – 15% of all four groups applied for these programs, 20% – 33% considered but did not apply to these programs, 21% – 32% did not consider these programs, and one-third (30% – 33% of all four groups) say that they are not aware of these assistance programs. For prospective home buyers who are aware of down payment assistance programs, the primary reason they did not apply for them is because they did not know enough about the programs (44% – 58% of all four groups).
Likewise, more than half of Realtors® (53%) say that at least one issue is holding their latest buyer back from saving a competitive down payment: most likely current rent or mortgage payments (23%) or credit card balances or payments (17%). Further, only 23% of Realtors® say that their buyers experiencing these challenges have applied for down payment assistance programs. This is most likely because their income is too high (30%), they did not know enough about the programs (19%), or they are worried about the competitiveness of their offers in multiple-bid situations (17%).
“Down payment assistance programs often fly under the radar for potential home buyers. Using programs – like FHA, VA or USDA loans – can make homeownership more attainable. Experts, such as agents who are Realtors®, can educate potential buyers about these programs. Doing so will bring in more first-time buyers and narrow the racial homeownership gap,” added Lautz.
Discrimination also plays a role in the homebuying process. About one in six (13% – 16% of all four groups) prospective home buyers across races and ethnicities report facing discrimination. More than half of Black (63%), Asian (60%) and Hispanic (52%) prospective home buyers who report this say it was due to their race or ethnicity. Of these, the largest proportions of every group are most likely to report that this discrimination manifests in steering toward or away from specific neighborhoods (36% – 51% of all four groups) and more strict requirements (32% – 48% of all four groups). Despite all of this, most discrimination during the homebuying process goes unreported: 47% – 81% who describe it did not report it to a government agency or legal aid organization.
Interestingly, only 1% of Realtors® who took the survey report that their buyers experienced discrimination during the homebuying process, while 13% are not sure. Those reporting discrimination are most likely to say this is based on race or ethnicity and lay this at the feet of lenders, saying that buyers experienced this in the type of loan product offered (43%) or that buyers did not receive a call back from lender(s) (29%). Of those who report discrimination, 57% report it based on race, 29% report it based on age and 21% report it based on familial status (including marriage or parental status). Just 7% say that the buyer reported the discrimination, which was on the basis of either race or religion or both, to a government agency or legal aid organization.
To help address discriminatory practices in real estate, NAR offers several resources to its members, including Fairhaven, an interactive training simulation based on real fair housing cases; Bias Override, an implicit bias training course with practical tips to override bias; At Home With Diversity, a certification course aimed at serving diverse consumers; and a confidential voluntary self-testing program for brokerages to assess agents’ compliance with fair housing laws. In Washington, NAR advocates for strong fair housing and fair lending enforcement, and policies aimed at closing homeownership gaps among demographic groups.
About the National Association of Realtors®
The National Association of Realtors® is America’s largest trade association, representing more than 1.5 million members involved in all aspects of the residential and commercial real estate industries. The term Realtor® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict Code of Ethics.
Are you interested in purchasing a home, but having a tough time coming up with the necessary down payment?
Well, for a limited time, Wells Fargo is offering to help homeowners out through its “LIFT” programs, including NeighborhoodLIFT and CityLIFT.
The San Francisco-based bank and lender has teamed up with NeighborWorks America to provide $170 million in down payment assistance to select borrowers who meet certain requirements.
Before you get your feathers ruffled, this isn’t the same type of irresponsible program that nearly sunk the FHA.
This is a more legitimate version that requires homeowners to get educated and stay in their homes for a long period of time. Or so they say…
If you meet all their requirements, you can receive up to $30,000 toward down payment (depending on the city in which you buy).
The LIFT Requirements
– Household income cannot exceed 120% of area median – Must be an owner-occupied, primary residence – Property must be located in an eligible city – Borrower must complete homeowner education course – Borrower must be approved for a first mortgage loan – No manufactured homes – If you currently own a home, it must be sold prior to closing
Here is the income limit chart for Los Angeles, which allows up to $30,000 in down payment assistance.
Other participating cities include:
– Atlanta – Chicago – Houston – Jacksonville – Las Vegas – Los Angeles – Miami – Minneapolis/St. Paul – Oakland – Orlando – Philadelphia – Phoenix – Sacramento – Tampa – Washington D.C.
How the LIFT Program Works
It’s similar to a regular home purchase
Except you have to buy in an eligible city
And complete a HUD-certified homeowner education course
They recommend a 60-day escrow to ensure you have time to arrange the down payment assistance
It’s just like a typical home buying process, with a few additional steps.
First, you must find a home within an eligible city, make an offer, and sign a purchase contract.
While doing all that, you’ll need to complete an 8-hour HUD-certified homeownership education course.
To schedule one, you’ll need to contact the local housing counselor partner in the applicable participating city.
Wells Fargo recommends a 60-day escrow to ensure there is plenty of time to fund your loan and get the down payment assistance request granted.
When applying for your mortgage, you’ll also have to tell your lender (it doesn’t need to be Wells Fargo) to notify the local housing counselor partner in your city to determine eligibility.
They will work together to get you approved for both the down payment assistance and your new loan to ensure everything goes smoothly.
While you don’t need to use Wells Fargo, they are the sponsor of the LIFT programs, so it might make for smoother sailing.
Tip: The lower your household income, the higher the down payment assistance amount, generally.
The down payment assistance is a grant, with a 0% interest rate that is forgivable.
For each year of residence, 20% is forgiven, so if you stay in the home for five years, it’ll all be forgiven.
But if the property is sold, refinanced, foreclosed, or non-owner occupied (or if title is transferred) within the first five years, the prorated balance must be repaid.
The only exception to this rule is a rate and term refinance that lowers the interest rate, which based on today’s mortgage interest rates, is not likely.
So there is it. If you’re in the market for a new home and live in one of the cities listed above, it’s another alternative for those with little set aside for down payment.
Is your poor credit history preventing you from obtaining your financial goals, such as getting a credit card, buying a car, or purchasing a home? If so, there are steps you can take right now to improve your credit score in as little as three months.
This article provides actionable steps you can take today to start on the path to rebuilding your credit.
In This Piece
How Quickly Can You Improve Your Credit?
The exact amount of time it can take to repair your credit score depends on several factors, such as your current credit score, the amount of debt you owe, your ability to repay your debt, and your overall credit history.
Despite this, you can start making improvements in as little as three months. Below is a look at five things you can do to improve your credit score, along with tips to keep in mind.
1. Pay Off the Debt You Can
Start by paying off as much debt as possible. There are several strategies you can use to pay down your debt, including the debt avalanche method, the snowball method, and a debt consolidation loan. No matter which method you use, the faster you can pay down some of your debt, the sooner your credit can start to improve.
Keep in mind that it could take your creditors up to 30 days to report payments to the credit bureaus and another 30 days for the credit bureaus to post these payments to your account.
2. Minimize Your Credit Utilization
Your credit utilization ratio accounts for up to 30% of your overall credit score. This ratio compares the amount of credit you have available with the amount of credit you’ve used. It’s recommended to keep this ratio below 30%. If you’re having trouble hitting this number, here are some things you can do.
Ask for a Higher Credit Limit
If your credit utilization ratio is above 30%, you can ask your credit card company to increase your credit card limit. This strategy will increase the amount of credit you have available, which can help lower your credit utilization ratio.
Use as Little Credit as Possible
Instead of using your credit card to make multiple or large purchases, consider using another method to pay. The less you have charged to your credit card, the better your credit utilization ratio will be.
Taking these steps to decrease your credit utilization rate could start to improve your credit in as little as 60 days.
3. Keep an Eye on Your Credit Report
According to a recent study, 34% of Americans found at least one mistake on their credit report. Just one credit card error could damage your credit score. This is why it’s so important to keep an eye on your credit report.
You can request a free credit report from all three major credit reporting agencies, Experian, Equifax, and TransUnion, at annualcreditreport.com. Obtaining your credit report is just the first step; you also want to perform the following tasks.
Check Your Report for Errors
Carefully review your credit report to make sure all the information listed is correct, including your personal information and account details. Make a list of any incorrect information and any accounts or personal information that’s missing.
Dispute Inaccurate Information
The best way to remove incorrect information on your credit report is to file a dispute with the credit reporting agency. Write a dispute letter that clearly explains what inaccurate information is listed on your credit report and why it’s incorrect. Submit this letter, along with any supporting documents, to the credit bureaus listing the error.
Typically, the credit reporting agencies have up to 30 days to investigate your dispute and another 5 days to let you know their decision.
Ask if Lenders Will Remove Paid-Off Items From Your Report
Many lenders report past-due accounts to credit reporting agencies to entice customers to pay their debts. Once you pay your debt off, the lender may be willing to remove this debt from your credit report. Contact your lender directly to make this request.
It could take days, weeks, or months to receive a clear answer from your lender. If they do agree to remove this debt, it could take up to 60 days to reflect on your credit report.
How to Add Your Utility Bills to Your Credit Report
Typically, utility companies don’t report on-time payments to the credit bureaus. You can, however, work with a reporting service company, such as Credit.com’s ExtraCredit service, to make sure these payments along with your rent payments are listed on your credit report. This step can help prove you have a strong payment history.
Once you sign up for a credit reporting service, you can expect to see these payments on your credit report within 60 days.
4. Consider Applying for a New Line of Credit
Having a mix of different types of credit accounts, such as revolving credit accounts and fixed-payment accounts, makes up to 10% of your credit score. If you want to boost your credit score, it’s important to have a nice mix of different accounts. Below is a look at some types of credit accounts you may qualify for even if you don’t have good credit.
Are Credit Builder Loans Right for You?
As the name suggests, credit builder loans are designed to help you build credit. This type of loan is different from traditional loans, as you don’t have access to the money until you make all your payments. Obtaining a credit builder loan can be a great way to save money while building your credit because these lenders often report loan payments to the credit bureaus.
Types of Credit to Consider
If you can’t obtain a traditional credit card, there are other options, such as:
Secured credit card. With a secured credit card, you’ll be required to put down a cash security deposit prior to obtaining your card. Otherwise, these credit cards work just like traditional cards and can help you build your credit.
Authorized user. If you can’t obtain your own credit card, you can ask a friend or family member to add you as an authorized user to their account. If the credit card company reports your authorized user status, it can help build your credit.
Tips for Applying for New Credit
While maintaining a mix of credit accounts can help you build your credit, you want to make sure you don’t open too many new accounts too quickly. This action could damage your credit score due to excessive credit inquiries. Instead, take it slow and gradually open a mix of accounts.
Opening just two different types of credit accounts, such as a car loan and a credit card, can impact your credit as soon as they’re reported on your credit report.
5. Keep on Top of Your Finances
Keeping on top of your finances is a very important building block in your credit foundation. Start by building a budget and sticking to it. This step can make sure you don’t overspend, help you start to save money, and learn to be more conscious of how you’re spending your money on credit.
What to Do if You Don’t Have Credit
If you currently have little to no credit, you may be wondering how you can build credit in just a few months. Taking some of the steps above, such as working with a reporting service company, obtaining a secured credit card, or becoming an authorized user, can help you build credit as soon as they are reported.
Knowing how to raise a credit score in three months is just the first step. Now, it’s time to take action.
No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the future and join us at Connect.
It’s been nearly 30 years since so few homeowners were seriously delinquent on their mortgages, but that trend could come under pressure if early-stage delinquencies continue to creep up, according to a sneak peak at August numbers released Friday by data aggregator Black Knight.
Black Knight’s first look at its August data showed 448,000 homeowners were seriously delinquent in August, meaning they hadn’t paid their mortgage in 90 days or more. That’s the lowest level since June 2006, after a 4 percent drop from July and a 25 percent decline from a year ago, when about 600,000 homeowners were seriously delinquent.
The number of homes in active foreclosure was also down 24 percent in August compared to pre-pandemic levels, falling by 5,000 from July to 215,000. That’s the lowest level since March 2022 after foreclosure moratoriums put in place during the pandemic were lifted.
At 3.17 percent, the overall delinquency rate improved from 3.21 percent in July, and is nearly a full percentage point below the average for August from 2015 through 2019.
But Black Knight said the number of homeowners who were in the early stages of delinquency (30 or 60 days behind on their payments) has increased for three months in a row, suggesting that delinquency rates may be nearing a bottom.
“We don’t necessarily think that serious delinquencies are going to begin to rise – that population is still improving at a relatively healthy clip,” a Black Knight spokesperson told Inman via email.
Foreclosure starts were also up by 21 percent from July to August, but at 31,900 were still 21 percent below pre-pandemic levels.
The five states with the highest percentage of seriously delinquent borrowers were all in the Southeast: Mississippi (2.12 percent), Louisiana (1.76 percent), Alabama (1.43 percent), Arkansas (1.20 percent) and Georgia (1.15 percent).
Black Knight — which is now part of Intercontinental Exchange Inc. following an $11.9 billion acquisition that closed Sept. 5 — will release its more in-depth Mortgage Monitor report on Oct. 2.
Monthly payments at record high
The last Black Knight Mortgage Monitor report found that due to rising mortgage rates and home prices, buyers purchasing a home in July were facing average principal and interest payments of $2,306 a month, the highest on record and a 60 percent increase from a year ago.
Equity insulates many from foreclosure
Source: Black Knight Mortgage Monitor, August 2023.
But rising home prices have also given many homeowners a comfortable equity cushion that could allow them to avoid foreclosure if they have trouble making their monthly payments, as they’d be able to sell their homes and walk away with some cash.
When the Black Knight Mortgage Monitor last tackled that subject in depth, the report found mortgage borrowers had more than $16 trillion in equity in June, or an average of $199,000 per household.
At $10.5 trillion, tappable equity – the amount that can be safely cashed when refinancing, while still leaving a 20 percent equity cushion – was within $434 billion of record 2022 peaks.
Editor’s note: This story has been updated to clarify that Black Knight expects that the overall delinquency rate may rise, not serious delinquencies. Historically, sustained increases in short-term delinquency rates can push up the serious delinquency rate.
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So, you’re considering purchasing a home? There’s a lot to think about—there’s lots of mortgage buzzwords and industry lingo to decipher. It can all be very overwhelming, especially for first-time home buyers.
One of the main decisions you need to make regarding your mortgage is selecting a fixed-rate or an adjustable-rate mortgage. Fixed-rate mortgages charge the same fixed interest rate for the duration of the loan. Adjustable-rate mortgages, on the other hand, have rates that fluctuate over time.
It’s important to understand how each type of mortgage works and how interest rates can impact your mortgage payments. Keep reading to learn more.
Key Takeaways
Interest rates for fixed-rate mortgages remain constant over the life of the loan.
ARM mortgages start with a lower fixed-rate period before switching to variable rates that are assessed regularly.
Deciding if an ARM or fixed-rate mortgage is right for you depends on your specific situation.
In This Piece
How Adjustable-Rate Mortgages (ARM) Work
Interest rates with an adjustable-rate mortgage, also referred to as an ARM, are variable—meaning they can change over time. Typically, ARMs start with a fixed-rate period, such as one, three, five, seven, or 10 years. After this initial period, interest rates adjust annually based on the current index. Your mortgage agreement details these terms.
When shopping for an ARM, you’ll notice that many types are listed as a ratio, such as 1/1, 3/1, 5/1, 7/1, 10/1 and more. The first number represents the number of years the mortgage will remain at the fixed-rate amount. In the example above, this would be one, three, five, seven, or 10 years.
The second number indicates how often the rates are adjusted after the initial fixed-rate phase is over. In most cases, this number is one, to represent one year. This means that rates are adjusted annually for most adjustable-rate loans.
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Fortunately, many ARM agreements also include a cap for interest rates. For instance, one of the most common types of ARM is 5/1 with a 2/6 cap. This notation means the mortgage has a five-year fixed-rate period, after which the rates will reset every year. Interest rates, however, can’t increase more than 2% in any given year and not more than 6% in total over the life of the mortgage.
During the initial fixed-rate period of your mortgage, your monthly payments remain exactly the same. However, once this period is over, your monthly mortgage payments are likely to change from year to year depending on interest rates.
How Fixed-Rate Mortgages Work
Unlike an adjustable-rate mortgage, interest rates with a fixed-rate mortgage remain constant throughout the life of the mortgage. One of the best benefits of a fixed-rate mortgage is that your monthly payments remain exactly the same until the loan is paid in full. However, the amount of principal paid each month may fluctuate.
A disadvantage of fixed-rate mortgages is the potential for interest rates to decrease dramatically over the course of the loan. However, you can choose to refinance your mortgage, if you qualify, to take advantage of these lower rates.
ARM vs. Fixed-Rate Mortgage: Example Mortgage Payments
The table below can help you better understand the difference between mortgage payments for ARMs and fixed-rate loans.
Type of loan
5/1 ARM
30-year Fixed-Rate Loan
Mortgage amount
$400,000
$400,000
Interest rates
6.86%
7.66%
Monthly payments
$2,623.71 per month during the initial five-year fixed-rate period (payments will adjust annually thereafter)
$2,840.81
As you can see, initial interest rates are typically much lower for ARMs than for fixed-rate loans. However, after this initial phase, these rates can increase, which will also increase monthly payments. Use our convenient mortgage calculator to determine how much you can expect your monthly payments to be per month for an ARM and a fixed-rate mortgage.
Is an ARM or Fixed-Rate Mortgage Better?
There are advantages and disadvantages to both adjustable-rate and fixed-rate mortgages. For example, fixed-rate mortgages are easier to budget because monthly payments remain the same throughout the life of the mortgage. This can be a huge advantage for homeowners who are concerned about increasing rates.
However, if interest rates decline over the course of your loan, you’ll be stuck paying a higher amount. It may be possible to refinance your mortgage to take advantage of these lower rates. However, you must still have the right credit score to buy a home.
On the other hand, a great advantage of ARMs is that they typically offer lower initial interest rates. Oftentimes, homeowners have lower monthly payments during this initial phase vs. those opting for fixed-rate loans. The disadvantage is that interest rates could spike during the fixed-rate phase. If this happens, homeowners could face significantly higher mortgage payments at the end of the initial fixed-rate period.
Why Would You Choose an Adjustable Rate Over a Fixed Rate?
Adjustable-rate mortgages are an attractive offer for many first-time home buyers. First, they offer lower interest rates for the first several years, which results in lower monthly payments. Secondly, many first-time home buyers only plan to stay in their homes for several years before upgrading to larger houses.
In these cases, an ARM loan can be an ideal option because they’re likely to move before the end of the fixed-rate phase or soon after. This option allows them to enjoy lower interest rates until they’re ready to upgrade.
Tips for Choosing
Ultimately, selecting an ARM or a fixed-rate mortgage is a personal decision that depends on your specific situation. However, if you’re trying to choose between these two options, here are some factors to consider.
How Long Will You Be in the Home?
The first thing you want to consider is how long you plan to stay in your new home. If your plans are to remain in the home for only several years, an ARM may be the best option. For instance, if you plan to stay in your home for less than seven years, a 7/1 ARM will allow you to take advantage of lower interest rates until you sell the home.
If, on the other hand, this is your forever home, and you have no plans on moving in the near future, a fixed-rate mortgage that offers consistent monthly payments may be the better option.
How Frequently Does the ARM Adjust?
You also want to check the details of the loan and determine how often ARM rates will adjust. For example, a 7/1 ARM offers 7 years of ARM rates at the fixed rate, then the interest rates readjust every year afterward. Rates on a 7/6 ARM will readjust every six months. If this is too much fluctuation for your budget, you may want to consider a fixed-rate mortgage.
What Are Interest Rates Like?
Another thing you want to consider is the current state of interest rates and predictions for future increases or decreases. When interest rates are low, investing in a fixed-rate mortgage can help you lock in these lower rates. Alternatively, when interest rates are high or rising, it may make more sense to select an ARM, with hopes that these rates will come back down before the initial fixed-rate period ends.
How Much Can You Afford Now?
ARMs typically offer lower monthly payments during the first few years. This can be an attractive option for those just beginning their careers and planning to increase their earnings in the future. An adjustable-rate mortgage allows you to take advantage of lower monthly payments now and risk possible higher payments when you have more wealth.
Can You Afford a Payment Increase?
It’s important to recognize that as interest rates with an ARM adjust, so will your monthly payments. Make sure you can budget these shifts. Even if ARM caps are in place, monthly payments can increase quickly, especially with a six-month adjustment frequency. If you’re uncertain of your ability to maintain higher monthly payments, you may want to choose a fixed-rate mortgage.
Understand Your Options
Fixed-rate and adjustable-rate mortgages are both good options for home buyers. The important thing is to understand the difference between these two choices and to evaluate your specific situation. When you factor in these issues, you can better determine which option is right for you.