How to Overcome the Barriers to Homeownership
By Paula Pant
Think you can’t buy a home? Think again. Trulia surveyed renters who want to buy a home, asking about the obstacles that hindered their goal. The survey respondents cited several barriers to buying a home, all of which are listed below. Let’s explore these obstacles to homeownership, and look at how you can overcome each of them.
Qualifying for a Mortgage
The ability to qualify for a mortgage is actually made up of several factors. Let’s look at the factors that buyers find most problematic:
Not Saving Enough for a Down Payment
A whopping 55% of survey respondents named saving for a down payment their biggest obstacle when it comes to buying a home. Why is this a problem? Many lenders want you to put down 20% of the sales price of a home in order to avoid being hit with mortgage insurance fees. A 20% down payment can be a hefty sum to come up with. But it’s not impossible.
If owning your home is your dream, start prioritizing it. Take a long, hard look at your current budget and pinpoint where you can cut back. Can you rent a smaller apartment? Can you move back in with mom and dad temporarily? Can you take on a second job?
Put the money into a high-yield savings account. And don’t succumb to the urge to cash in a life insurance policy, borrow from your 401k, or put your savings into risky investments in the hopes that it might grow faster. These acts aren’t worth it in the long run.
Having a Poor Credit History
Your credit score is a number issued by FICO, the Fair Issac Corporation. It’s determined by the credit history collected by three major credit-reporting bureaus: TransUnion, Experian, and Equifax. (You’ll actually have three credit scores – one with each bureau. Lenders generally look at the median score.)
Most lenders consider a credit score above 740 to be healthy, while anything below 600 is considered poor.
If you don’t know your credit score, it’s time to get familiar with it. You can (and should) get a free report from each of the three credit bureaus each year. You can access all of these at annualcreditreport.com. (Note: You’ll get a credit report, which won’t tell you your numerical FICO credit score. But it will display your credit history, including any negative marks that might be on your record.)
Take a close look at your report, and if you see any errors, contact the credit bureau immediately to dispute the claims.
What if there aren’t errors? Focus on maintaining solid good-credit habits. Your credit score is determined by how long your accounts have been open, how much outstanding debt you currently have, whether you’ve recently opened new accounts, the types of credit that you use, and your payment history.
Not Having a Stable Job
Lenders will look at your past two years of employment history. If you’ve had a lot of part-time jobs, if you’ve recently graduated, or if you otherwise don’t have a steady income, this could prove to be a stumbling block for you. In these cases, your best bet is to make sure all your other financial ducks are in a row. Clean up your credit, build up your savings, and make sure to pay all of your bills on time. Reduce or eliminate your debt, so that your debt-to-income ratio is low. Being able to demonstrate financial responsibility, even with a fluctuating income, can help prove you’re not a lending risk. If you have any sizable assets, be sure to include that information as well.
Unable to Pay Off Existing Debt
Lenders want to see you spending less than 36% of your gross monthly income on all of your debts (mortgage, car loans, student loans, credit cards, etc.). The higher your debt-to-income ratio, the riskier you are for them. (And, let’s be honest, the less freedom you have to find the house of your dreams.)
If your debt is out-of-control, it’s time to cut up your cards and start aggressively paying down your balances. Starting with the card that has the highest interest rate, throw everything you can toward paying off the balance, then move down the list to your next-highest-rate card. Not only will this make you more desirable to lenders – it will give you more financial freedom when you are ready to buy a home.
In addition to “qualifying for a mortgage” (which comprises of having a solid down payment, a stable job, good credit, and low debt levels), survey respondents also cited two broad economic factors that posed as a barrier to homeownership.
Rising Mortgage Rates
Much has been made of recent spikes in mortgage interest rates, but the truth is, interest rates should be one of the least of your worries. Waiting to buy a home based on short-term interest rate fluctuations can be a bad gamble. For example, if you buy a $200,000 home, the difference in your monthly payment at a 3.5% interest rate versus a 4.5% interest rate will be roughly $100. If an extra $100 a month will break the bank for you, then you might not be in the best position to consider something as big as homeownership.
If you’re just super budget-conscious, consider that there’s always the option to refinance down the line if rates drop. If you find the ideal home, with all the right amenities in the perfect location, it might not be worth passing on it just because raters are up an extra percent.
Rising Home Prices / Limited Inventory
There’s not much you can do about rising home prices or not enough homes on the market – but there are some ways you can work around these issues and still get a great home.
Widen your “preferred neighborhood” boundaries and consider areas outside of your ideal location. There could be some great neighboring areas you’d love just as much if you explored them.
Consider buying a fixer-upper home and then putting in some sweat equity, especially if it only needs cosmetic features rather than a structural overhaul. If the show Property Brothers has taught us anything, it’s that sometimes a cheaper house with a decent renovation budget can be even greater than a move-in ready home you aren’t able to customize. (Plus, you can remodel slowly, as you gradually save up the cash.)
Finally, open your mind to types of homes you hadn’t considered. The detached single-family home isn’t the only option out there – think about duplexes, townhomes, condos, and other kinds of living arrangements.