NEW YORK (MainStreet) — Many consumers have made buying their first home less of a daunting task by seeking housing counseling from a non-profit organization.
In 2014, more than 73,000 people received housing counseling from the National Foundation for Credit Counseling’s member agencies, making it the highest volume experienced during the past five years. The renewed interest in housing counseling could be an indicator that many people are considering home ownership as an affordable option.
The Benefits of Advice
“Seeing that more people are realizing the value of housing counseling is a sign that the next wave of home buyers will be better prepared to preserve home ownership,” said Bruce McClary, spokesperson for the NFCC.
Many consumers can receive free counseling and advice from non-profit groups or government agencies which helps them to understand the relationship between their credit history and the cost of home ownership such as property taxes and home insurance, he said.
“Past credit mistakes can lead to higher interest rates, causing home buyers to make compromises on their quality of life if they don’t know how turn things around,” McClary said.
Counseling can also help all consumers, even those with lower credit scores, to navigate the complicated system of getting approved by a lender for a mortgage and to obtain the lowest interest rates. Neophytes in the house market can make even the most basic mistakes; a recent Consumer Financial Protection Bureau survey revealed, for example, that 47% of homebuyers are not comparing lenders when they are seeking mortgage offers.
People who do participate in housing counseling sessions or workshops are more likely to review multiple mortgage offers. Since they compare offers, these consumers are likely to save more than those who only worked with a single lender, he said.
First time buyers should attend counseling sessions since these programs offer practical advice on budgeting, advice on finding financing and the importance of a home inspection, said Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh.
“There are classes offered at low cost or no-cost by many non-profit agencies and HUD-approved counseling agencies,” she said. “Some first time home buyer programs require counseling so that would fulfill a requirement and also give them helpful hints to prepare to be an owner.”
Prospective homebuyers should get pre-approved before they begin looking at homes because it helps them determine what they can afford, Titsworth said. The pre-approval process means the consumer goes through formal underwriting which will take into account credit scores, income and assets to determine their ability to afford a mortgage. Being only pre-qualified, by contrast, is less stringent and provides only an overview and does not have an underwriter review it.
Even people who are pre-qualified will still have to go through the formal approval process which can impact the timeline, she said.
“In tighter real estate markets, many sellers want to see a buyer has already been pre-approved and not just pre-qualified,” said Brook Benton, vice president and mortgage banker with Atlanta-based PrivatePlus Mortgage.
You Better Shop Around -- But Within Reason
Homeowners should look at a range of mortgages before committing to one since the typical American homeowner moves every seven years, said David Reiss, professor of law at the Brooklyn Law School in N.Y. For example, obtaining a “relatively expensive 30-year fixed rate mortgage may not make sense," he said, if you can save a lot in monthly payments with an adjustable rate mortgage (ARM).
ARMs have a certain period of time where the interest rate remains the same, such as 84 months for a 7/1 ARM or 120 months for a 10/1 ARM and then it adjusts each year for the remainder of the mortgage.
“This might be particularly true for very young households or for empty nesters, both of whom may have different needs in five or ten years,” Reiss said. “It is hard to predict where interest rates and prices are going, so holding off on buying when it seems like the right time to do so for your personal situation is risky.”
Over course, don't overdo your search.
While it is tempting to try and get the lowest mortgage rate online, applying to many different firms may not be the best bet and can drop your credit score, said Keith Baker, a professor who teaches mortgage banking at North Lake College in Irving, Texas.
If you wind up choosing your loan within 14 days, your credit score will probably be safe because most credit scoring models have been designed to recognize when a consumer is rate shopping and avoid penalizing them, he said. The most recent FICO score ignores all mortgage or auto loan inquiries made within a 45-day window, but there are still some companies which use older versions of the FICO score which determine the interest rate based on a 30-day or a 14-day window.
“Once the ‘window’ has passed, the loan inquiries are treated as one,” Baker said. “Whether a consumer’s credit score will be influenced by rate shopping depends on which credit score your lender is using.”
Additional Sage Counsel -- Exercise Restraint
While getting advice on pre-approval and mortgage rate comparison can be vital for first-time homebuyers, there are more nuanced considerations to examine.
Make sure the money you have for a down payment is set aside in an account that has been "seasoned," which means you can show documented proof such as bank statements for a minimum of three months, said Diana Hill, a real estate expert at Online Trading Academy, an Irvine, Calif. company which offers finance classes.
Even if you have been approved for a mortgage, do not change jobs or apply for new credit cards before you have completed the closing, said Jeff Golding, CEO of WilliamPaid, a Chicago-based company which allows people to build credit through paying their rent online for free.
Switching jobs for a higher paying salary or applying for a new credit card with a lower interest rate might be a red flag for a lender and may demonstrate to them that you need more credit, he said.
“It doesn’t mean you won’t qualify, but it can throw a snag in the process,” Golding said. “Don’t do it. Wait until you are done and have secured the loan. Keep the status quo to avoid any pitfalls.”
Lenders also look for consistent income over a period of several years. It’s important to have been in the same job for two years and have tax returns for the last two years, Hill said.
When the contract is signed and the closing date is set, it is tempting to start shopping for major home purchases such as a new refrigerator, but do not open a new line of credit before your closing date, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a company which helps consumers resolve debt issues.
“Lenders often pull credit reports right before the closing to make sure your financial situation has not changed since the loan was approved,” he said. “A new line of credit or even having had a company check your credit rating could cause your score to drop.”
Even if you get approved for a large mortgage for that dream home, maintain some breathing room. The standard guidelines call for keeping housing expenses below 35% of total income, but some experts are revising that number down to 28%.
"Breathing room in the budget will help secure a home even if something unplanned does occur such as car repairs or medical issues,” Gallegos said.
--Written by Ellen Chang for MainStreet