Affordability

Although the home prices have risen rapidly over the past few years, housing remains affordable. Based on data collected in this report, a typical family in Minnesota earns enough to pay approximately 124.5% of the cost of a median-priced house ($225,260, according to the report). Housing is even more affordable in the Twin Cities area, where the prices are higher, but the wages more than make up for it, and a typical family can pay for 131% of the cost of a median-priced home.

Interest Rates

Its interesting to see how the interest rates continue to stay low, even with the Fed raising interest rates to prevent inflation. Take a look at those two graphs, and see how far we’ve gone (down) since the bad old days of the late 80′s!

Financing

Not much going on here, but the chart in this section is interesting, as it seems to show a little uptick in the “percent of listing price received”. See for yourself, I would have thought that this would go down in a “buyer’s market”, but you of course need to factor in how long the average house is on the market, and other statistics…

Unemployment

Its good to see slow, steady job growth, which would seem to indicate that the state of Minnesota has stabilized at a high employment rate. From what I’ve read, the major factor in rapidly decreasing home values (a housing “bubble” bursting) is a major increase in unemployment.

Average sale price

Put simply, the average sales price of a residential home rose by 8.9% from the 1^st to the 3^rd Quarter of 2005. Not factoring in the 4^th quarter of 2005, we are below the appreciation (average sales price increase) rate of 2002 (10% increase), but above 2003 appreciation rate (6%).

Marketing time

The metro’s average time on market remains at less than two months, and actually decreased from the first quarter of 2005. Its not as low as its been in recent years, but with an average marketing time of 51 days, it is still historically low.

Adjustable-rate mortgages aren’t as common as they used to be, accounting for 28.8% of all mortgage applications, down from the peak of 36.6% in March 2005. This hopefully means:

1. Buyers are starting to buy houses they can afford, instead of over-extending themselves and hoping that the appreciation will make up the difference
2. Home prices are leveling off while wages rise, making homes more affordable to more people

Perhaps the most obvious reason for this though, is that according to Bankrate.com, the average interest rate of a fixed-rate 30 year mortgage is 6.15%, while a 5-year ARM’s average interest rate is 5.71%, a narrower gap than it used to be.

Although I am no expert on credit, here are some of the suggestions I can provide.

Help create a credit history for yourself – keep your credit accounts open

This is one mistake many future buyers do, paying off balances on credit cards and then closing the accounts. Lenders like to see long credit histories with rotating balances, so closing accounts as you pay them off may prove counter-productive. Wait until after you move in until you start closing accounts.

Be Careful What Balances You Pay Off And Pay Down

Trying to decide what balances to concentrate on when you are trying to reduce debt? Three basic rules of thumb:

1. Reduce your balance/available credit ratio to below 50% of each account. That means, if you have an account with a $1000 credit limit, try to keep the balance below $500. Another useful tip in paying down your lines of credit is to observe which ones yield the highest interest rate and aim to pay those down first. This way, you are saving money in interest payments that can be dedicated to making larger payments on other accounts later.
2. Try to reduce long-term debt to short-term debt. For example, if you have a car loan with 14 months of payments left, try to pay off 2 months, so it shows as a short-term debt that can be paid off within 1 year
3. For the most part, don’t worry about trying to pay off student loans and SOME consolidation loans.

Don’t leave that job just yet

The longer you are at a job, the better you look to lenders. Delaying a job switch especially if it is to surge into another field will assist you tremendously in seeking that perfect rate. As lenders like to see stability in your cash to debt ratio, they also prefer candidates who have a stable job history as it makes the mortgagee look more reliable and thus more attractive.

Keep the spending and large purchases on the backburner for now

If you discover that you have great credit in the process of obtaining financing for your home, don’t mess it up by applying for a bunch of credit cards or buying a new car before you purchase your house.

Pre-Approval is just the First Step in the Process

Getting a pre-approval, running numbers and scenarios with mortgage brokers can give you a good estimate as to what rates you can obtain, how much you can afford, and how much you can expect to pay per month. After you get the pre-approval, don’t assume that the lender is committed to the numbers they gave to you; a pre-approval is simply a go-ahead stating that you will qualify for some sort of loan. It is not a promise that you will get any rates you may have discussed, nor does it mean your loan is rock-solid. Until you have your rates locked in and the underwriting process is complete, you are still under surveillance and subject to full approval.

That being said, it is not a wise idea to begin any lines of credit or creating higher balances on, your credit cards as though the loan has been processed, because as you read above, the process has only just begun. In between the time that you submit an offer in a written purchase agreement that has been full accepted and negotiated with the seller and the closing which is usually 30-60 days away, the process then begins to finalize your loan. If you haven’t already, you may now lock in your loan with your mortgage lender. The next steps are crucial to finalize and secure the loan and include conducting research and an examination of the title on the home, the production of an appraisal to assure the house is worth what you have offered and the final underwriting.

Although underwriting usually is a sign that you will have a successful closing, several things can still go wrong, so take control of things you can such as keeping up your strong credit. Another way to assure you are protected is to be sure to include a Financing Addendum into your purchase agreement; this will protect you in the event that you are unable to obtain the financing terms you want.

Shop Around!

Even as a seasoned real estate professional, I was hesitant to shop around for mortgages for fear that having multiple inquiries on my credit would negatively affect my credit score. However, I learned that when mortgage lenders pull your credit report, it is different than when you apply for a credit card which appears upon your credit report as a request for additional funds. When mortgage lenders pull your credit report, it is listed as an inquiry, which should not negatively affect your credit. Therefore, shopping for the best mortgage terms and rates is necessary to find both a mortgage lender that you are comfortable with and a mortgage rate/payment that will suit you. Also remember if it sounds to good to be true, it probably is. Several mortgage companies sell gimmicks such as “no credit” or “bad credit”. While they may be able to help you secure a loan, there are several hidden fees that you will have to pay as well as a significantly higher mortgage payment. In these cases, it is usually best to work improving your credit score to save money now and to obtain a reasonable mortgage payment. Other illegal mortgage practices include promises to give you money back. The federal government mandates that any funds exchanged in a real estate transaction must be included on the HUD, which is the settlement you review and sign at the closing to verify all the numbers involved in the selling and purchase of the home. Always be cautious for these scenarios and be willing to ask questions and conduct your own investigation into these practices. It is oftentimes helpful to include your Realtor in the process; he or she may have a lender they have a proven track record with that could offer you the service you want.

Don’t forget – this is one of the biggest financial decisions you will ever embark upon – do not be afraid to ask questions and seek out the best mortgage option that works for you!

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