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Peter Benjamin
Written by:
Peter Benjamin, CMB®
Senior Vice President, Mortgage Lending
NMLS #408105
Office: 240-292-5361 | pbenjamin@lfcu.org

Most young homebuyers today would be shocked to learn that in 1981, the average interest rate on a 30-year fixed mortgage was about 16.63%,¹ an intentional measure by the U.S. Federal Reserve designed to curb rampant inflation. In today’s market, the Fed has actually lowered interest rates to historic lows in order to boost lagging inflation rates from the coronavirus pandemic. This is excellent news for anyone considering buying their first or next home.

Winning the Contract in 2021

With that being said, there are several factors that are impacting the housing market in today’s economy, such as declining home inventory and an influx of prospective buyers who are finally ready to embrace homeownership.

So even though low interest rates have made it a great time to buy, prospective buyers face high competition in obtaining the home of their dreams. Therefore, it’s important to be well-prepared to have a chance at scoring a home in today’s red-hot real estate market.

To qualify for the home of your dreams and ultimately improve your chances of winning the contract, here are three things to keep in mind as you embark on your homebuying journey:

  1. Understand the Process
  2. Know Your Loan Options
  3. Partner With a Qualified Real Estate Agent

Understand the Process

Every homebuying journey starts somewhere. One of the most informative places to start is at a homebuying workshop. This summer, Lafayette Federal Credit Union is hosting several free workshops to help prospective buyers be more prepared.

Homebuying workshops offer a great opportunity to learn how to improve your chances of getting into your dream home, as well as gain further knowledge about what criteria are important when purchasing a home, such as the neighborhood location, school district, and surrounding areas.

You’ll also learn more about real estate terms, mortgage loan options, and strategies to increase your chances of being approved for a mortgage, some of which we cover below. For a comprehensive guide to the homebuying process, read our 9-Step Guide to Homebuying.

The Importance of a Pre-Approval (aka a Loan Approval Commitment)

Getting a Pre-Approval – or Loan Approval Commitment – in today’s market is essential to winning the contract. You need to be able to show sellers that you’re a serious buyer and that your lender is going to follow through on the offer you submit.

A lender will look at two basic factors when evaluating your eligibility for a mortgage loan: your ability to repay the loan and your willingness to repay.

Your ability to repay determines how much you can afford. Ability is based on information such as your gross annual income and your monthly debt. Additionally, your lender can review other financial resources, including funds from your personal savings, gift funds from a family member, and grants or down payment assistance programs. All of these resources can be used to fund your down payment and closing costs.

Your willingness to repay is informed by your creditworthiness. Your creditworthiness is evaluated by your Credit Report Repayment History and your FICO® score, which is a three-digit credit score that is essentially a summary of your credit reports from the three major US credit bureaus: TransUnion®Opens in New Window, Equifax™Opens in New Window, and Experian™Opens in New Window.

Your FICO® score also impacts the interest rate you’ll be offered if you qualify for a mortgage loan, so the higher your score, the better off you will be. Before scheduling your appointment at LFCU to start the Loan Approval Commitment process, we encourage you to check your credit score and begin taking steps to improve it, if necessary.

Always Be Thinking Ahead

Because the homebuying process moves so quickly in today’s market, it’s important to think ahead and stay organized. You’ll need to obtain your final approval before closing on your dream home, and even though you’ll already have submitted documents for your Loan Approval Commitment, you’ll likely need to provide further documentation for your Final Approval.

To make it easy, remember the "Rule of 2.” To prove your income, you may be asked to submit 2 recent paystubs, 2 years of W-2s, and 2 years of tax returns (if applicable). To prove evidence of your assets, you may be required to submit 2 recent monthly bank statements and proof of gift funds (if applicable).

Of course, you may need to submit additional documents based on your situation before you obtain your Final Approval, so good organization is key to a smooth closing.

Know Your Loan Options

In our most recent homebuying workshop, we defined and discussed different types of mortgage loans that are available to prospective homebuyers. Lafayette Federal offers a variety of mortgage programs, such as:

  • First-Time Homebuyer Loan Programs
  • Traditional Fixed-Rate Mortgages
  • Jumbo Mortgages
  • Construction to Permanent (a great option in our lower inventory environment)
  • Bridge Loans

Most first-time buyers may find themselves deciding between an Adjustable Rate Mortgage (ARM), a Fixed-Rate Mortgage, or a Construction to Permanent Mortgage. Fixed-Rate Mortgages offer the security of a monthly payment that will never change (not including insurance and property taxes) over the life of a loan. The most common loan terms for Fixed-Rate Mortgages are 15 years, 20 years, or 30 years.

Monthly payments for an ARM, on the other hand, may change over the life of the loan. Typically, the interest rate will stay fixed for a short period at the beginning of the loan – 5 years, for example. After this period, the interest rate on the loan is subject to adjust periodically based on the market. One huge benefit to ARMs is that they typically offer lower initial interest rates than Fixed-Rate Mortgages.

Beyond Fixed-Rate Mortgages and ARMs, Lafayette Federal offers other types of mortgages to best meet the financial needs of our borrowers. We don’t expect you to be an expert, so your LFCU Mortgage Loan Officer can help educate you on your different options and help you make an informed decision about the right mortgage product for your situation.

Don’t Be Afraid of Private Mortgage Insurance

The thought of Private Mortgage Insurance (PMI) makes some buyers think they need to have 20% of a home’s purchase price before buying, but this simply isn’t the case.

In fact, PMI allows more prospective buyers to get into their dream homes – and begin building equity in the property they purchase – more quickly. Here’s an example to illustrate:

Imagine that you plan to get a Fixed-Rate mortgage and you have $20,000 saved for a down payment. If you believe you need a 20% down payment to avoid PMI, you can only look at homes that are $100,000 or less (not very likely in the DC metro and surrounding areas).

The truth is, PMI gives you greater opportunities to expand your budget and find a home that meets your needs. If you find a house you absolutely love that is $400,000, you could still put down your $20,000 as a 5% down payment. The lower down payment allows you to move into your dream home without spending years saving up $80,000 for a 20% down payment on the same home.

There are downsides when you wait too long to buy. The years you spend saving your down payment are likely years you’ll be paying rent. In today’s market, rent prices are often the same or even higher than mortgage payments, and your rent payments are building someone else’s equity instead of your own. And there’s always the possibility that while you wait, interest rates could rise. A 1% increase in interest rates would mean you pay an extra $250 per month on that same $400,000 loan.

With those drawbacks in mind, it can often make more sense to obtain a loan with PMI if PMI is the only factor holding you back from purchasing a home. The good news is, once you reach 20% equity in your home, you’ll typically no longer have to pay for PMI. If you have more questions about PMI, we invite you to contact an LFCU Mortgage Loan Officer to get your questions answered promptly.

Partner With a Qualified Real Estate Agent

Selecting a qualified real estate agent will greatly improve your chances of securing your dream home. An experienced buyer’s agent will act as one of your biggest advocates during the homebuying process. You’ll have a seasoned negotiator who can save you money and help you avoid pitfalls.

Your agent will also save you time by curating a list of homes within your budget that meet your criteria. And, you have a facilitator who can help you understand and tackle the myriad of paperwork associated with purchasing a home. Plus, real estate agent fees are almost always paid by the seller! So if this is your first time buying a home, you typically don’t need to worry about paying your agent’s fee.

In today’s market, you have to move quickly, so it’s important that your real estate agent is efficient, reliable, and has your best interests in mind. Finding a trustworthy real estate agent is easy when you’re a member of LFCU. Lafayette Federal HomeAdvantage® is an exclusive, free member service that can help you search, buy, sell, and save on your next home. When you work with one of our agents, you can even qualify to earn Cash Rewards.

Being successful in your home buying journey is as easy as 1, 2, 3. One of the most important things to remember is that LFCU is here to help. I hope this guide improves your chances of qualifying for your dream home and has been useful! Don’t forget to register for our upcoming homebuying sessions.

 

 
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