If you're looking to buy a home in today's competitive real estate market, there are three things you must have. If you have these items lined up, you may be considered a stronger buyer, which can help you immensely.
1. At Least $20,000 in Cash
The market has radically changed, and in many markets across the country, sellers are in control. You'll need at least $20,000 of your own funds or have access to at least $20,000 to buy a home successfully, and in order to be taken seriously in a competitive offer situation. That's $10,000 for a down payment and $10,000 for closing costs. The purchase price of the home will dictate your specific amount of money you'll need to get your foot in the door. Understand, the higher the purchase price, the more of the $20,000 will go toward the down payment, as you need at least a 3.5% down payment to buy a home.
On a $400,000 single-family home, a 3.5% down payment would be $14,000. In this scenario, $6,000 would go toward the closing costs, which would mean you'd need another $4,000 in the form of a seller credit, a lender credit or perhaps gift funds or even a real estate agent commission credit — all of which are acceptable cash sources.
Qualify for as much house as you can, doing so gives you the ability to offer more to effectively finance any shortfall on the needed cash. While it still might be dicey to obtain a seller credit for closing costs, it becomes more likely if you have more buying power at your disposal. Even if you are looking at a home for, say, $300,000, you would still need at least $20,000 to pull it off without asking for any credits or concessions in the transaction. The offers that typically stand out are strong, with no concessions.
2. A 620 Credit Score or Higher
This gives you more options both for an FHA Loan and a Conventional Loan to the max county loan limits. For example, in Sonoma County, Calif., the maximum loan size on either loan program is up to $520,950. A 620 credit score gives you more options on either mortgage loan program. If your credit score falls between 600-619, you can still buy a home using a loan insured by the FHA. Additionally, you'll be subject to some additional mortgage lending requirements such as a maximum debt ratio of 43% (more on this later), as well as being required to take a homeownership counseling class sponsored by HUD no matter what your previous housing history is. If you're not sure what your credit score is now, there are many ways to check it for free. You can get two credit scores for free on Credit.com, updated monthly, to see where you stand and monitor your progress.
3. A Manageable Debt Ratio
A debt-to-income ratio that's considered "acceptable" is typically pegged at 45% or lower, although on some FHA loans, it can go as high as 52%. If it passes through automated underwriting, it's insurable for the Federal Housing Administration. While it's recommended from a prudent financial planning standpoint to keep your debts low in relationship to your housing payment, higher debt ratios for FHA loans are still widely acceptable in the lending industry. Acceptable does not mean recommended, consumers are left to make that choice.
This means your income needs to be high enough to support any consumer loan payments you might have — such as car loans, student loans, alimony, child support, any kind of recurring debt obligations plus a proposed mortgage payment, and those combined debts should not generally be more than 45% of your gross income. If they are higher than 45%, you may still be able to qualify for the loan. If you can't, you could always pay off debt to qualify, buy less, borrow less or look at taking a lower interest rate, to generate a lower proposed housing payment. Here's a calculator that can help you determine how much house you can afford.
All three of the above-mentioned things are of equal importance, one will not offset the other. If, for example, you don't have enough cash at the moment, but will have it at later date, tell your mortgage company. If you have additional funds to pay down debt in a way that would increase your credit score, but it takes away from the down payment funds and/or the closing costs, talk with your mortgage company. These are all things your lender must know about you in the pre-approval stage.
Alternatively, you could look at a lower-priced home or a different type of property to make the mortgage payment more manageable if cash and credit are tight. Gone are the days of being able to buy a home with no money down, since you're more likely to be going up against competitors gunning for the same home who are coming in stronger than you. Information about the other offers is not disclosed in real estate transactions, so putting your best foot forward can greatly increase your odds of buying a home.
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