Ever wondered if homeownership is possible for you, you're not alone! It's a process, but it's possible!
1) Qualifying Credit
Credit requirements vary by loan type and lender, but buyers can qualify with a score as low as 580.
Many first-time home buyers worry their credit score may be too low to qualify for a mortgage. Most of the time, though, you can qualify with a below-average score.
FICO scores fall on a scale between 300-850, and the national average is 710. But some mortgage programs don’t have a credit score requirement at all.
Having a lower credit score doesn’t automatically disqualify you from getting a loan. Since lower credit scores represent risk to lenders, you may be able to qualify by offsetting risk in other ways, like adding a co-signer or providing a higher down payment. Consumers are entitled to a free credit report annually with AnnualCreditReport.com. The easiest way is by getting pre-approved for a mortgage loan.
2) Proof Of Income & Finances
There are no set income requirements to buy a house, and your monthly income isn’t the only determining factor. To buy a home, you will need to provide lenders the following:
Proof of employment
If you’re a salaried employee, proof of income means showing pay stubs and a year-end W-2 statement. If you’re self-employed, you’ll need to show tax returns and evidence of your business. If you have a job offer letter but haven’t started work yet, you’ll need proof of the job offer signed by all parties.
When it comes to your financial history, lenders are simply looking for a pattern of paying bills mostly on time.
Your monthly income and debt will be viewed together to establish your debt-to-income ratio (DTI), which compares how much you make with how much you spend. If you spend $30 of every $100 you make on your housing payment and credit debts, your DTI would be 30 percent.
The Consumer Financial Protection Bureau (CFPB) recommends a ratio under 43 percent. Some lenders may still approve borrowers with a DTI up to 50 percent, and sometimes more, depending on compensating factors. For example, having more money in savings, adding a co-signer, or providing a larger down payment will improve your chances.
Low income or student loan debt won’t prevent your approval. You will need a history of paying bills mostly on time and job-related income that gets reported to the IRS.
3) Cash Needed to Close
There are programs that can help you buy a home with as little as 3 percent or no down payment at all.
USDA and VA loans have no down payment minimums. Low- and no-down payment mortgages are available to homeowners with all credit scores. These loans are best for home buyers with a reliable income and not much money saved up.
Down payment assistance (DPA) programs can also help you cover closing costs. Most first-time home buyers spend around 1-2 percent of the home’s purchase price in closing costs.
So, how much money do you need to buy a home? Assuming a home sale price of $350,000 with a down payment of 3 percent and closing costs of 1.5 percent, you could purchase your first home with as little as $15,750. If you utilize a down payment assistance program, you could buy this home with $0 out of pocket.
4) Home Buying Budget
Home buyer competition can be fierce. The buyers who win are the buyers who prepare. Knowing how much you want to spend on housing each month puts you in a powerful position — you’ll know when to push and when to move on to another home.
Budget for all steps of the home-buying process, including:
How much you want to contribute to a down payment
Expected closing costs
Your preferred monthly mortgage payments
Once you’ve estimated your budget, set or adjust savings goals as necessary. Remember that your monthly mortgage payment includes five factors, commonly referred to as PITIA:
Principal — your mortgage payment
Interest — your borrowing rate
Tax — state property taxes
Insurance — homeowners insurance
Association Dues — fee paid to homeowners association (when applicable)
Only you know how much home you can afford. Banks will approve you for the maximum amount possible, even if it’s outside the amount you feel comfortable borrowing. Only spend what fits in your budget.
5) Mortgage Loan
Almost 9 out of 10 home buyers use a mortgage to purchase their home. You probably will too. That’s why it’s important to understand the different mortgage options available to you.
There are five primary mortgage loan types, each with its own set of rules:
Conventional mortgages: These loans require a 3 percent down payment and are usually best for those with steady income, some money saved up, and a credit score of 620 or higher.
FHA mortgages: These loans require a 3.5 percent down payment and are available to those with lower credit scores.
USDA mortgages: Designed to promote homeownership in rural areas, these mortgages are backed by the U.S. Department of Agriculture.
VA mortgages: Available to current and past U.S. military members, VA loans allow buyers to purchase a home with no down payment.
Portfolio mortgages: These loans are privately held by lenders, so rules will vary from firm to firm. They typically require better-than-average income and credit.
Conventional loans are the most popular — 82 percent of first-time home buyers use them.
6) Mortgage Pre-Approval
Mortgage pre-approval is a dress rehearsal for your final approval. Savvy home buyers always get pre-approved before house shopping because pre-approvals:
Help you determine how much house you can afford
Provide an itemized estimate of all costs involved
Allow you to make a serious offer on a home
Reveal potential improvements in your application to get you a better mortgage rate and terms
During the pre-approval process, lenders review your income, assets, and credit report to determine how much you can borrow and at what rate.
Typically, pre-approvals are good for 90 days because your situation may change between the time you get pre-approved and when you make an offer. If you’re coming up on the 90 day expiration date, contact your lender to have it refreshed.
You may also hear about getting pre-qualified for a mortgage, which is different than getting pre-approved. Pre-qualifications take estimates and don’t typically verify your financial documentation, whereas a pre-approval does.
7) Real Estate Agent
In the United States, a home buyer’s real estate agent is paid for by the seller. It doesn’t cost you to have an agent. Because you aren’t the one footing the bill, you should get the best agent you can find.
An experienced real estate agent helps you:
Find homes in your preferred price range and location
Negotiate with the seller and seller’s agent
Draft and submit your offer
An agent can make or break your deal, so we recommend spending some time to find the right person. Meet with and interview several agents until you find someone you feel confident can help you find your dream home.
Be sure to get your own representation. When one agent represents both the buyer and seller, it’s called dual agency. Dual agency results in worse service for both buyer and seller and tends to favor the seller, so avoid this at all costs.
Home-buying isn’t like car shopping. When you’re shopping for a car, you can find a model you like and request a different color or leather seats. When you’re shopping for a home, it comes the way you see it.
That’s why it’s important to know your must-haves, nice-to-haves, and deal breakers before viewing homes. Understanding what you can and can’t compromise on will help you know when to jump on a listing and when to walk away.