As a real estate professional, you’re probably well aware of the potential equity and tax benefits renters could be missing out on, but they might not understand them. That’s why some renters who could benefit today from homeownership still remain on the fence. Even when they decide to jump in the market, everything about the homebuying process is entirely new. That’s why first-time homebuyers need professional advocates like you, and we’re here to help put a plan of action together. Here are six points to get you started.
1. Help determine if they’re a good fit for homeownership.
Questions to ask potential clients…
- Do you have a two-year employment history?
- Do you have a record for paying bills on time?
- Can you afford to make payments on outstanding debts, such as school or car loans?
- Do you have money saved or can you get a gift for your down payment and closing costs?
- Can these funds be verified in a bank account?
- Do you have the ability to pay a mortgage payment every month, plus additional expenses?
If they can answer “yes” to these questions, they may be ready to move forward!
2. Help them understand the benefits of homeownership.
Stable housing costs
While monthly rent payments build profit for the landlord, mortgage payments can build equity for the homeowner—plus possible tax advantages! For those who choose a fixed-rate mortgage, principal and interest payments are fixed for the life of the loan, a clear advantage over rental market fluctuations.
Even if the landlord lets renters paint and make other alterations, it’s hard to justify spending the cash to update a house or apartment that isn’t theirs. Homeownership changes all that. Get your clients excited about the opportunities they’ll have to express their personality with paint, window coverings, landscaping and more. And if they buy a brand-new home, they might be able to make design choices from the very beginning—possibly with the option of rolling the cost of new home selections into their monthly payment!
Moving on their timeline
Renting always comes with the risk that the landlord will want to sell the property, forcing the renters out at the end of their lease. Homeowners have the peace of mind that they can stay until they’re ready to sell.
3. Help debunk these common myths.
They must have a 20% down payment
Fact: Qualified borrowers may secure a home loan with only 5% down. A select few might even pay as little as 3% with a Conventional loan and 3.5% with an FHA loan. Those eligible for a VA loan may not need to pay anything down.
They need a near-perfect credit score
Fact: It’s still possible for your clients to qualify for a home loan with a mid-level score. And there are a couple tricks that could help offset a less-than-stellar credit history, such as having a low debt-to-income ratio and offering a larger down payment.
4. Help get their credit in order.
This is an important step before they apply for a home loan. Credit scores help lenders determine whether loans will be approved, as well as what interest rates they’ll offer a homebuyer. Have them follow these steps before filling out a home loan application:
Check credit reports
Even if they think they have great credit, errors on reports may be lowering their score. Make sure they get a separate report from all three major credit reporting companies, because they collect information separately and may report different errors. By law, they’re entitled to a free report from each credit bureau annually. To request credit reports, direct them to www.annualcreditreport.com.
Keep old accounts open
Closing old credit card accounts can affect credit scores negatively in two ways. First, it can shorten the average account age, making homebuyers look less reliable to lenders. Second, closing accounts reduces the debt-to-credit ratio, making any balances clients have appear larger in proportion.
Hold off on major purchases
Tell clients to hold off on purchasing that new TV. While increasing debt affects credit scores, keeping money in savings is also important. Mortgage lenders may see your clients as less of a risk if they have a cash reserve to get through tough times.
Don’t apply for new credit cards or loans
Although using credit cards responsibly may improve credit, opening new accounts shortly before or during the mortgage application process can lower the average account age and result in a lower overall score. Increasing debt during this timeframe with new loans for items like cars and furniture can also negatively affect your clients’ credit.
5. Help them pre-qualify.
Pre-qualifying can be an easy way to determine how much your clients are able to borrow. Whether they submit information on line or by phone, they’ll need to have the following items handy:
- Most current 30-day pay stub
- All asset information (recent two-month checking/savings account info, retirement funds, stocks, bonds, etc.)
- Creditor information (credit card statements, auto loan statements, etc.)
- Dates of employment; address and phone number of current and previous employers
- Two years’ W-2s
- Rental information for the last two years (if applicable)
6. Help manage wish list expectations.
With their finances in order and pre-qualification out of the way, your clients are down to the fun part: shopping for their first home! But it’s important to help manage expectations. It can be easy for first-time buyers to assume they’ll get everything on their wish list, without realizing that flexibility and a certain amount of compromise are often part of the process. Once they get their wish list items down in writing, work with them to prioritize what’s most important. For example, is living near a certain school more important than having a 3-car garage? If they understand beforehand which they’d choose if both weren’t an option, it could help streamline the process down the road.
For a more extensive roadmap, check out our First-time Homebuyer Guide! Share it with your clients.