Surveys of potential home buyers, particularly first time
buyers, are telling us that many could use a little more knowledge about two of
the largest costs of ownership. Everyone
needs a mortgage and insurance is necessary as well. Your lender will require that insurance
premiums be escrowed in advance to be certain that the money is there when they
are due. Mortgage interest with a long
term fixed rate is at least predictable and stable, but too many new buyers
aren’t aware of how their credit rating influences their mortgage rate.
The Mortgage and Credit Scores
Transunion, the credit rating agency, recently announced the
results of a survey of potential buyers.
The survey of those planning on or considering buying a home in the next
12 to 18 months, found that while nearly 74% believe it’s important to check
the accuracy of their credit report, only 45% or fewer correctly understand
that their credit score measures:
·
The amount of debt that they hold.
·
The risk of them not paying back the loan.
·
Their financial resources available to pay the
mortgage payments.
Many believe that their payment history and on-time payments
would be the only or the major factor in whether they get a mortgage or
not. Also, too many fail to understand
that the risk measurements influence the mortgage interest rate they’ll be
offered. Small increases in the rate
result in mortgage payment increases that can result in being denied a loan on
a home they believe is affordable for them. In fact, only around half could identify the
aspects of the home buying process affected by credit scores: interest
rate (52%), the amount they can borrow (53%) and their mortgage lending terms
(50%).
When it comes to improving credit scores before applying for
a mortgage, around a third of consumers surveyed thought that simply increasing
their income would have a significant effect on their scores. And, 28% thought that closing old accounts
would help a lot. Both of those things
do have some influence on scores, but not nearly as much as many consumers
believe.
Only around half of survey respondents understood that their
credit score directly influenced the amount they can borrow, the interest rate
they would be offered, and the terms of the mortgage. Only around a fifth of consumers correctly
identified three months as the correct time before applying for a mortgage to
check their credit score. Almost a third
of respondents believed that one month before was sufficient time.
Insurance Premiums and Deductibles
The majority of consumers understand that raising the
deductible on a homeowner insurance policy will reduce their monthly
premium. However, far fewer of them
understand that deductibles offered vary by state and even in how they’re
offered (flat dollar or percentage).
Insurance is a must-have, and lenders will require advance payments into
escrow to fund premium payments in the future.
They will not allow a policy to lapse in order to protect their
investment.
Why do deductibles vary by state? The first and most obvious reason is that the
terms of insurance are controlled at the state level. They typically average somewhere between $250
and $5,000 per claim. One study found
that raising the deductible from $500 to $2,000 could reduce policy premiums by
as much as 16%. So, many home buyers
understandably want to run their deductible up to reduce their monthly outlay.
However, that monthly savings varies a lot by state, with
the 16% number being a national average estimate. In some states like Texas, it can result in a
savings of only as much as 6%. In North
Carolina that increase from $500 to $2,000 could drop premiums as much as
41%. When lenders are approving mortgages,
the cost of insurance factors into the amount they’ll loan on a home based on
income and expenses of the borrower.
If you’re about to gear up to buy a home, start planning
early for credit evaluation and insurance cost estimates. You want to get prepared and have a firm
understanding of what your lender is checking to determine what they will
approve for your loan.
No comments:
Post a Comment