Buying a home is one of the most important decisions you will ever make. It’s not only a large personal decision, and arguably the American Dream, but it’s the largest investment you’ll make and with that comes a lot of responsibility.
Before you search for a house, get pre-approved or speak to a realtor, you need to determine if you’re ready to buy a house. To get approved to buy a house, lenders look at 4 components equally. You need to ultimately tick off each criteria in order to get a loan approved.
Credit Score and Credit History- Ideally, in order to have a likely chance of your loan getting approved it’s best to have a minimum credit score of 620, but there are a lot of cases where lower scores will work.
Employment and Income- Mortgage lenders verify the last two years of employment along with documenting your current income. A common misunderstanding is that it must be continuous employment with one employer. Lenders simply need to document the companies you’ve worked for in the last two years.
Debt-to-Income (DTI) Ratio – This is the primary calculation used to determine how much you qualify for and ultimately the maximum mortgage payment you can have when buying a house.
Down Payment & Assets- Nearly all loan programs require a minimum investment (or down payment) and it’s determined as a percentage of the purchase price. The down payment and total amount due at closing must be verified by the lender about 7-10 days BEFORE closing, so all of those funds need to be in your checking or savings account by then.
Here's a look at financing options:
Conventional loan – These are secured by Fannie Mae or Freddie Mac and they’re also responsible for setting the program guidelines. This is one of the most common loan programs people choose when buying a house.
Conventional loans have a First Time Home Buyer option that allows for as little as 3% down. The typical down payment for a Conventional loan is 3-5% and, with a 20% down payment, can avoid PMI (Private Mortgage Insurance) completely. They require a 620 minimum FICO score and allow debt-to-income ratios as high as 50%.
FHA loan – FHA mortgages is a HUD/government-backed program and was originally created for people with fair to good credit or higher debt-to-income ratios. FHA loans allow down to a 520 credit score but you’ll often need a higher score to get a loan approved. FHA allows a
VA Loan – the VA loan is strictly reserved for qualifying veterans and qualifying widow(er)s. The VA loan is also a government-backed loan, so it has similar guidelines and interest rates as the FHA loan. The primary benefit of a VA loan is that it does not require a down payment in most instances and there is no monthly mortgage insurance. Instead, it has a fee called the VA Funding Fee that can be rolled into the loan at closing.
USDA Loans – Rural Housing are another government-backed program particularly for houses in more rural areas. USDA generally is ideal for individuals with low-to-moderate income, borrowers with good credit (640+), buying a home in an eligible location and have low debt-to-income ratios.
Having a great lender that can compare and analyze options for you, knows the rules for each program, and can ensure you’re getting into the best home loan for your scenario is of upmost importance! We have a list of experienced lenders we'd be happy to recommend.