National Home Ownership Month - June 2018

Many people are surprised to learn that the majority of Americans (~64%) own their home (defined as the percentage of homes that are owned by their occupants).  This rate can vary depending on various factors such as age (younger people are less likely to own a home) or location (ownership rates are lower in western states where the cost of a home is typically higher as compared to other parts of the country).

Purchasing a home is usually the largest and most stressful financial transaction a person makes in his/her life.  Being informed and prepared ahead of time is highly recommended as a way to help make the home buying process as seamless as possible.

Here are some items to consider.

  1. Is owning a home the right choice for you at this time?

In most locations, home values are increasing at dramatic rates since the “great recession” and there seems to be this pressure that if you don’t get in on the real estate opportunity right now you are missing out on a “sure bet” to grow wealth.

But think about it, is home ownership right for you?

  • Can you afford homeownership? In addition to the mortgage payment, you need to consider other expenses such as property taxes, insurance, general maintenance and upkeep costs, association dues, etc.
  • How migratory are you? Do you plan to stay where you are currently living for a longer period or are you more likely to move around at this point in your life? Owning a home can make it more difficult to quickly “pick up and leave”.
  • Do you want the “burden of property”? As homeowner, you (not the landlord) are responsible to upkeep the yard,  shovel the snow, repair the broken toilet, etc.
  • Are you purchasing a home as a “sure bet” investment strategy? While home values have been increasing there is no guarantee they won’t fall in the future.  Just do some research on home values plummeting during the “great recession” of the mid-2000’s!
  1. How much home can you afford?

We are currently in a seller’s market in most communities – meaning there is more demand than supply of homes for sale.  As such, home prices have been increasing and this can mean bidding wars allowing the seller to be choosy on what offer conditions they will accept.

To increase your chances of getting the home you want, you should take the time to get pre-qualified.  The pre-qualification process will assess your credit, income and assets to help determine how much home you can likely afford and the loan amount for which you would be approved.

You want to work with a trusted professional (or website), so ask friends and family if they can recommend a mortgage broker.  Interview several and pick one with whom you “click” and they can help you through this pre-qual process.

  1. Check your credit reports and FICO® Scores ahead of time.

Most of us need financing in order to purchase a home and mortgage lenders will carefully evaluate your credit reports and FICO® Scores as part of that loan evaluation process.  As such, it’s critical that you check all three credit reports (Equifax, Experian, TransUnion) to ensure all information on you is being reported accurately.

You’ll want to do this in advance of getting pre-qualified to give yourself enough time to engage in the dispute resolution process if you find inaccurate data reported.

You’ll also want to understand your FICO® Scores.  Most mortgage lending decisions consider your three FICO® Scores based on your credit report data from each of the three national credit bureaus. Be sure to focus on the following FICO® Score versions:

  • FICO® Score 5 based on Equifax data
  • FICO® Score 2 based on Experian data
  • FICO® Score 4 based on TransUnion data

And if you are applying with your spouse or any other person, they should do this as well since the mortgage loan process will usually consider the credit information and FICO® Scores of all applicants.

Higher FICO® Scores can translate into real economic benefit so it can pay to have a higher score during the mortgage loan application process.  The mortgage loan savings calculator illustrates how the average mortgage loan interest rates decrease as the FICO® Score increases resulting in a lower monthly payment with higher scores.  It also calculates estimated savings in interest fees paid over the life of the loan when different FICO® Score ranges are entered.

The house hunting and escrow process can take several weeks to several months.  You’ll want to track and monitor your credit reports and FICO® Scores during that time period so you are not caught off guard by an unexpected negative change in your credit status right at the time you want to make an offer on that dream home.

While purchasing a home can be a stressful experience, the good news is there are actions you can take ahead of time that can help you be better prepared to secure the right home at the right time for you and your family.

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Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.