When it comes to barriers to homeownership, the list can seem endless. From saving for a down payment to credit scores, there are many potential hurdles that stand between you and your dream of buying a home. However, with the right strategies in place, they don’t have to be insurmountable barriers with the help of an educated lender.
McGraw REALTORS® believes that everyone’s homeowner journey should be a smooth one, so let’s look at some of the barriers and how best to navigate them. The most common barriers to purchase include funds for closing, credit score, and debt-to-income ratio. These are all important considerations that can be addressed with the right strategies.
Gone are the days of 2-3% interest rates. Now, the average rate on a 30-year fixed mortgage is hovering around 6.5%, which is reflective of a healthy real estate market. Society tells us to be scared of rising interest rates, as it might make financing a home more challenging. However, with the right strategies in place, it is possible to keep your interest rate low and manageable.
Buying Down Points
Buying down points is a nifty strategy for lowering your monthly payment. It works by paying a premium upfront at closing to reduce the overall interest paid over the lifetime of the loan. This could be a great option for those looking to keep payments lower and more manageable. Each point represents 1% of the total loan amount, and historically lowers the rate by .25%. Seller concessions can be used to help cover these costs.
How Seller Concessions Can Lower Your Rate
Seller concessions are credits that the seller offers to you, the buyer, in order to cover some of your closing costs. Seller concessions can help substantially lower interest rates and make homeownership more affordable for buyers. A seller can increase the sale price of the home and use that additional money to cover the buyer’s discount points. This strategy is beneficial for both the buyer and seller, as it allows the buyer to buy down more points and achieve lower monthly payments. The seller also ends up with an increase in profits due to the higher sale price.
With this marketing strategy, the buyer is bringing $874.00 less to closing and the buyer’s monthly P&I payment is $258.97 less. The interest saved over the first 7 years is $33,106.00. We now have a comp with a 6.02% price higher, and the seller is netting around $2,051.00 more.
Down Payment Requirements
The traditional down payment requirement is 20% of the purchase price. However, that is no longer the case, as many mortgage programs now have down payment requirements as low as 3%, with 5% being the standard minimum down payment for conventional financing. This means that more people have the opportunity to become homeowners.
How Seller Concessions Can Pay For Your Closing Costs
By putting less than 10% down with conventional financing, sellers can use up to 3% of the purchase price toward a buyer’s closing costs, prepaid items, rate buydown, and/or upfront PMI. This is an excellent way to minimize the upfront costs of homeownership, as well as potentially reduce your interest rate and payments. By freeing up more of your funds, you are able to use them for other expenses such as other debt obligations, moving expenses, home repairs, and home furnishings.
We all know that closing costs can add up quickly and unexpectedly. This is especially true if you are buying a more expensive home, where closing costs are typically higher. In addition to the down payment, you may also be responsible for paying loan origination fees and other administrative costs associated with the loan.
How to Reduce Closing Costs
One of the best ways to reduce closing costs is to utilize seller concessions. The seller can increase the purchase price of the home and pay for the buyer’s closing costs by offering them a credit at closing. During negotiations, the buyer’s agent will discuss if the home will appraise. This can be beneficial for both the buyer and seller, since it allows the buyer to have more money in their pocket for other expenses, and the seller has the potential to net more.
With this marketing strategy, the buyer is bringing $10,274 less to closing and the buyer’s monthly P&I payment is $143.63 less. The interest saved over the first 7 years is $20,522.00. We now have a comp with a 6.02% price increase, making the seller’s estimated net around $1,650.00 more.
Debt to Income Ratio (DTI)
Your debt-to-income ratio is a key factor in determining your eligibility to qualify for a mortgage. It is calculated by dividing total minimum monthly debt obligations, including the proposed new mortgage payment, credit cards, student loans, auto loans, and other forms of debt reported to the credit bureau by your gross (pre-tax) monthly income. Generally speaking, lenders like to see a DTI of 45% or less.
How to Improve Your DTI
One way to improve your debt-to-income ratio is to pay down as much existing debt as possible. Paying off high-interest credit cards and loans can greatly reduce monthly payments, thus lowering your DTI and increasing your chances of being approved for a loan and affording your monthly mortgage payments. In addition, increasing your income can also help.
Why It Matters to Be Strategic With Your Debt
When it comes to barriers to homeownership, it pays to be strategic. Knowing which strategies and tools are available to you can help you reduce your closing costs and interest rate, improve your debt-to-income ratio, and ultimately make homeownership a reality. Sometimes taking care of high-interest debt is necessary before you can qualify for the monthly payments of a home.
Some Debt Is More Valuable Than Others
Debt with a lower credit utilization is considered to be a valuable debt because it shows that you have the ability to manage your debt responsibly. On the other hand, debt with a higher credit utilization could be seen as riskier. If you are dreaming about purchasing a home, it is important to be mindful of your debt utilization and make a continued effort to keep your balances at or below 33% of the allotted limit.
At the end of the day, understanding the barriers to homeownership is key to overcoming them. Knowing which strategies are available and how to use them effectively can help you become a homeowner.
Finding a Trusted Lender
Finally, perhaps the most important factor when it comes to barriers to homeownership is finding a local lender that you can trust. Working with an experienced and knowledgeable loan officer who understands your specific needs and financial situation is essential. A trusted lender can help you navigate the mortgage process, answer any questions you have, and get you on the path to homeownership.
When choosing the right mortgage lender for you, AMC Mortgage can provide the expertise and exceptional service you need. With over 30 years of experience in helping people purchase their dream homes, their team of experienced loan officers can help you make the right decisions for your financial future.
Contact AMC Mortgage
Phillip Allen Morrow | Mortgage Loan Officer
Office: (918) 488-6363 | Cell: (918) 607-8448