What are the four Rs of homeownership?

Even amid rising mortgage rates, there is still a clear path toward owning a home

What are the four Rs of homeownership?

With mortgage rates continuing to rise as the Federal Reserve attempts to stave off inflation, the dream of homeownership has become ever more elusive for an untold number of would-be homebuyers. But the situation is not as grim as some might paint it, and – with the right amount of planning and preparation – the American Dream doesn’t have to be a nightmare.

Eileen Derks, senior vice president and head of mortgage for Laurel Road, is downright bullish on homeownership, a palpable enthusiasm conveyed during a recent interview with Mortgage Professional America. Mere days after the mortgage rate for a 30-year fixed reached 5.89% – the highest in 14 years, in the midst of the Great Recession – Derks’ optimism failed to wane.

The key to carving a path toward homeownership, she explained, is to follow the four Rs: Review, Reflect, Research and Reach Out. MPA reached out to Derks to have her expound on the four Rs approach.

“I’ve been getting a ton of inquiries about how people navigate this marketplace,” Derks told MPA. “What we’re striving to express is if it’s a good time for you it’s a good time to buy. It’s okay. There’s not going to be a perfect environment.”

For some, even the historically low mortgage rates gone by turned out not to be a perfect environment in retrospect: “Right now, there are some people having buyer’s remorse,” Derks said. “They wanted to buy that house and bought it sight unseen – just jumping in. When it comes to your financial wellbeing I don’t ever advocate jumping in; I advocate doing your homework.”

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Thus, the emergence of the four Rs to educate those just now entering the housing market as consumers. “That’s why we put forth these four Rs,” Derks said. “Because whether it’s right now in a complicated marketplace or a non-complicated marketplace, first and foremost having good credit is always your best friend when it comes to borrowing.

Which brings us to the first R:

REVIEW, under which are the subcategories of credit reports and scores, assets, and budget. “There is a plethora of tools and resources out there to let you know where you stand,” Derks said. “There are people not even monitoring that, and that’s really important. And then two, there are ways to improve your credit. Now, credit scores can be elevated through demonstrations of consistent payment elsewhere, and that’s huge – especially as you think about broadening the reach of all individuals seeking to become a homeowner. Start with the foundational component of your credit score, and what you are doing to improve that and getting it to be the highest it can be.”

At the end of the day, one needn’t try to increase one’s score, but there are repercussions for not doing so: “You can still buy, you can still get a loan with a different credit level,” Derks noted. “It’s just going to be more costly and in a higher-rate environment, you should put yourself in a place to minimize your expenses and your costs.” 

REFLECT, with the subset of goals, timeline and needs, could be considered the more pensive cousin to the analytical Review. “That’s really stepping back and taking an inventory. How much money do you have? What is your income? What are your expenses? And really understanding what you have to put forth into this transaction, and not jumping to conclusions like ‘Oh well, I must not have enough so I’m not going to move forward.’

“Don’t assume that! You’re not a financial expert, and that’s not a derogatory comment. Gather the intel to understand what you have in savings, what are your expenses. Because those things come into play with down payment and closing costs.”

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And don’t panic if you can’t amass the 20% down payment that is the standard to buy a home. “There are all kinds of programs out there from zero to 20%, and knowing what your assets are and what you can bring to the table is really important and informs a budget.”

Moreover, income needn’t be limited to what it is now but could be viewed as a trajectory. For Laurel Road’s clients – predominantly doctors and dentists – incomes may be low during their residencies but increase exponentially in two to three years’ time, Derks noted.

RESEARCH relates to the housing market, mortgage options and saving opportunities. If Research is the pensive cousin, Reflect is the introspective one. This is where some degree of soul-searching comes in as it relates to goals. “What’s motivating you right now to buy a home?” Derks asks rhetorically, invoking one of the questions that one should ask when researching. “Is there a life change coming? Are you wanting to downsize because you’re an empty nester? Putting first and foremost the motivation because that’s the guiding principle on why you want to move forward.”

There are more questions to ask oneself: “What do you see on the horizon for the next six, 12 or 24 months? In a lot of cases, people might be thinking of changing jobs. Someone might take a job as they come out of residency or fellowship and move to a different place. It’s really reflecting not just on the now, but the future because it has a lot to do with what kind of products you might buy into. ‘My plans are very reflective on what kind of financial tools I want to take advantage of.’ Do you plan to go back to school? Do you plan to start a business?”

Take the latter as it relates to homeownership, for instance. In having a home, one begins to build equity, which could then be used to support a fledgling business, Derks said in the way of an example.

And, finally, there’s REACH OUT. To whom, you ask? A mortgage specialist, of course. It’s important to seek insight from professionals as one embarks on the path to homeownership. Don’t be anxious, however, as we’re in a very different situation from the Great Recession – notwithstanding the latest mortgage rate now reaching levels seen back then. “Homeowners today are in a much better place from a financial and credit perspective,” Derks said. “So we’re likely not going to experience a housing crash.”

So, follow those four Rs, and perhaps ultimately you’ll achieve two more: Rest and Relaxation.