The Resources You Need To Buy A House
The Resources You Need To Buy A House
Few people can buy their homes with cash; most people need to find home financing. For first-time homebuyers especially, the process can be a mystery. If you’re asking yourself questions like, “Can I buy a house?” or “What kind of house can I afford?” you can obtain the answers. But the process will begin and end with your financial situation. If you think you may be ready to buy a home, you will need to start getting your financial affairs in order so that you can achieve your dream of owning a home.
Lenders evaluate your creditworthiness by looking at different areas of your financial status. The metrics they will measure are your sources and amount of income, your credit score and credit history, your level of debt, your debt-to-income ratio, and the size of your down payment. Let’s take these items in turn.
Income
The lender can determine how much you can afford to pay every month by looking at your income level. In addition, your lender will be interested in how long you have had your job and your employment history – for example, whether you skip jobs often and whether your income has steadily increased over time. The longer you have a good employment and income history, the better.
Credit Score and Credit History
Your lender will access your credit history from one of the three major credit reporting agencies. At a minimum, you will need a credit score of 620 or higher (the scale goes up to 850). This is a “Fair” credit rating, but having a “Good” (670+), “Very Good” (740+), or “Excellent” (800+) rating is even better. In addition, the lender will take a look at your credit history.
If your score is low, there are some things you can do to raise it. It may take a few months, but it is helpful to ensure your credit score is solidly in “Good” territory. Steps to improve your credit score can include paying off some of your debt and making sure you make all your payments on time. Getting a free copy of your credit report from all reporting agencies is wise before you even apply for a loan. If you see something incorrect, notify the credit bureau to have it corrected. It may be that your score has been affected by erroneous information, so make sure the lender gets an accurate report.
Debt-to-Income Ratio
Your debt-to-income ratio is the total amount of your monthly income that must be used to service debt payments. Monthly payments for debts such as student loans, car loans, and credit card payments are all counted. If your debt-to-income ratio is over 50 percent, you will need to take some steps to lower it before you apply for a loan. Do what you can to pay off credit cards or other debt to eliminate those payments, even if it means cutting back on your spending or getting a side job for a few months.
Designated Cash Savings for Your Down Payment
Once you get in the proper financial position to support a home loan payment, you will also need cash for your down payment.
Today, depending on the situation, there are loans available for buyers that will allow them to put very little down –maybe just 3% of the purchase price. Some people may qualify for VA or USDA loans, which often allow buyers to put no money down. However, the higher your down payment, the smaller your loan amount will be, and the more equity you will have in the home. Deciding how much to put down will depend on how much cash you have and how much your down payment affects your monthly outgo on mortgage payments.
Other Costs Involved in Purchasing a Home
If you can put at least 20% down on your home purchase, your lender will not require you to purchase private mortgage insurance (PMI). If your downpayment is a lower amount, lenders will require PMI to protect themselves if you default on the loan. PMI will pay the lender part of the loan amount in case of default; it does not protect the borrower. The cost of PMI is added to your monthly mortgage payment. If you purchase a $300,000 home, PMI can add anywhere from $100 to $250 to your monthly bill. Once your equity in the home reaches 20% or 25%, however, you can ask your lender to drop the PMI.
Homeownership will entail other costs: property taxes and homeowners insurance. In most cases, your lender will handle these expenses by adding an amount to your monthly bill for these things, and then hold the funds in escrow to pay your taxes and insurance for you. When shopping for a home, you must calculate how these additional costs will impact your overall budget.
Finally, your lender will likely charge “points” for the loan. Points are simply the cost of the loan, equal to a fraction of a percentage of the loan amount. Lenders will sometimes advertise loans with no points; however, these usually have higher interest rates. You will have to look carefully at the available loans to calculate the best deal and what you can afford. Often, you can opt to pay the points up front, or you can have the points added to your total loan amount.
This is a lot of information to absorb, and if you feel the financial side of the home-buying process is daunting, we can help. Our mortgage loan originator can discuss with you what your financial profile needs to show to qualify for a loan and can take all the guesswork out of this process. Contact us today at Prime Real Estate Group to learn more.