Buying your first home isn’t just a matter of deciding how many bedrooms and bathrooms you need. It requires careful planning. You have to save up enough money for a down payment, pump up your credit score, and be able to convince a lender you are a good risk.
Before you even start looking at houses, you have to get pre-approved for a loan. To do that, you’ll need to look at your circumstances and understand what constitutes a good risk in the minds of financial institutions.
What Is Considered Good Credit?
It is possible to buy a house with less than perfect credit, but it will cost you. One of the reasons FHA loans are so popular with first-time homebuyers is because loans are available for those with credit scores in the low 500s. You can get a loan if your credit score is between 500 and 579, but you’ll have to come up with a 10% down payment. You’ll also be looking at a higher interest rate with a low credit score.
You’ll only need 3.5% for your down payment for an FHA loan if you have a credit score of 580 or above. In order to get a conventional mortgage, you must have a credit score of 620 or higher. The main difference between FHA and conventional loans is your credit score and the money you have to put down.
The VA doesn’t have a minimum credit score requirement, but lenders who make VA loans do. They like to see a score of at least 620.
Be aware that these numbers are minimum credit scores. The higher you aim, the better your chances of getting a mortgage at the lowest interest rate and the best terms. If you have a score under 740 you may incur additional fees, more paperwork, and a higher risk of being turned down altogether.
Do I Really Need 20% For a Down Payment?
The quick answer is no you don’t. You can get an FHA loan with as little as 3.5% down if you have a credit score of 580 or more. It is possible to get a 3% conventional loan if your credit score is 620 or higher.
One of the things you have to take into consideration when deciding how much money to put down is the cost of private mortgage insurance (PMI). PMI is lender protection in the event you default on your mortgage, and they have to foreclose on you. PMI is typically 0.05% – 1% of your mortgage and is rolled into your monthly payments along with the principal, taxes, and interest (PITI).
If you have enough money to make a 20% down payment on a conventional mortgage, you can avoid private mortgage insurance.
If you’re getting an FHA loan, you don’t pay private mortgage insurance. What you do have to pay is an upfront and then an annual mortgage insurance premium (MIP). The upfront MIP is normally 1.75% of the base loan. The annual MIP is normally 0.7% for a 15-year mortgage and 0.85% for a 30-year loan. MIP usually goes through the life of the loan.
What Does Debt-to-Income Ratio Mean?
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes to paying your debt, like auto and credit card payments. It can also include insurance premiums, taxes, and interest. Lenders use this number to help them determine your ability to repay the money they lend you. If your DTI is too high, the risk you will eventually default on your loan is also high.
If you are applying for an FHA loan, your debt-to-income ratio can’t be higher than 50%. It can’t be more than 41% to qualify for a VA loan. 45% is normally the maximum DTI allowed to get a conventional loan.
To get a good idea of what your DTI is, figure up all your monthly payments and divide it by your gross monthly income. If you find your DTI is over the allowable maximum for loan approval, you’ll have to pay down your debt before you start house hunting.
Is a Home inspection Required, and Who Pays For it?
If you are applying for an FHA or conventional loan, you don’t have to get a home inspection, but the property you are buying must be appraised by a certified appraiser. Even though the inspection is not a requirement, it is in your best interest to have the home thoroughly inspected prior to closing.
An appraisal is not the same thing as a home inspection conducted by a certified professional. Appraisers and inspectors don’t necessarily look at the same things. An appraiser’s job is to value the real estate. The home inspector, on the other hand, evaluates the condition of the home. Inspections can last several hours and are usually more thorough than appraisals, which tend to be walkthroughs. If the inspector finds that major repairs are needed, that weren’t disclosed in the contract, you have the right to renegotiate.
Before you make such a huge financial investment, it’s worth the $300 – $400 it will cost you to ensure the house is structurally sound, free of lead-based paint, and without any major defects.
Can I Buy a House Without Using a Realtor?
The short answer is yes you can. The more important question is: should you? The answer to this is almost always no. There are many advantages to using a Realtor to help you navigate the house buying process, especially if you are a first-time homebuyer.
With a Realtor, you have a professional working on your behalf. A good real estate agent will eliminate the houses that don’t fit your needs, making the process more efficient and streamlined than you can do on your own.
Agents know which houses are over or underpriced and can help you negotiate an advantageous deal with the seller. They may be able to get seller concessions like paying for repairs or a portion of the closing costs.
Not all houses for sale are advertised to the general public. Realtors know what is being offered privately and can get you in to see houses that would otherwise be unavailable to you. Realtors can be real time savers. Instead of spending your whole day trying to get in touch with sellers to set up appointments for property tours, your agent will do the legwork for you.
If you’re unfamiliar with the legal documents a real estate transaction requires, you need a professional to decode them for you. Your Realtor will make sure the contract offer you make to the seller is complete and will explain any counter offers or addendums to the contract. Your Realtor will go over the closing documents and explain what you can expect at the closing table.
And remember, you don’t pay the real estate agent. That commission is the responsibility of the seller or the builder.
Buying a house for the first time should be an exciting experience. To help avoid stress and disappointment, you have to do your homework first. Know the requirements needed for a low interest, fixed-rate mortgage, know your credit score and your debt-to-income ratio, get pre-approved for financing and decide what kind of home you’re looking for before you start your search.
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