Buying a home? You will need need patience, resilience to rejection, and sound financial planning, if are serious about pulling it off. Your income is important, but the rest of your financials need to be in order as well. What you’ll need…
You need not earn gobs of money to be successful in purchasing a home, well, depending on your area. You do however, need to have enough income after personal obligations and a mortgage payment left over. Your income is the only measure the lender has to offset a liability, i.e. a new mortgage payment. You need to be able to show consistent income coming in, and enough of it, that your mortgage payment and other current liabilities you may have are manageable in relationship to your monthly income before taxes.
Other loans Generally, the more loans already in place before a mortgage is considered is what use first lenders use first including liabilities like car loans, student loans, credit card payments etc. While having those against your income doesn’t limit your ability to borrow on a mortgage, it’s not necessarily a red flag as long as these things plus a new mortgage payment is 45% of your income or less. Put simply, if you were to earn $9,000 per month income pretax, the lender would want $4950 per month of that $9000 per month left over allocated towards other things after considering debts + mortgage payment. The remaining 45% of that income $4050 would go towards paying the mortgage payment and other liabilities at the maximum comfort level the lender would have in granting you a loan to buy a home. Ideally consuming less, totaling a lower payment to income ratio is ideal for long term affordability.
Your credit score can be as low as 600 which is the minimum credit score to get a mortgage these days on an FHA mortgage. A higher score results in more loan offerings and more opportunity. The credit scores does dictate what loan program you can go apply for which ultimately might sway a seller in determining which offer they go with. Remember how you look on paper not only to the mortgage company whom you’re hiring to procure financing, but also the seller and the real estate agents should not be ignored. This is a big factor many home buyers overlook.
One such example is the following… let’s say your credit score is in the 620 range, and as such you are going with an FHA Loan. FHA Loans still have a stigma attached to them amongst the real estate agent community that they are harder to obtain and the FHA is more picky on property type which ultimately means a more problematic escrow. Real estate agents influence all the parties including buyer and the seller alike. In other words, if you have an FHA pre-approval and you’re buying a home there is a possibility the seller might frown upon that and look more closely at other offers in relationship to price, but also in relationship to loan program because Conventional Loans are the cream of the crop. Your finances can impact loan program which can ultimately have the ripple effect in your ability to procure home successfully. You be able to get a loan, but convincing a home seller becomes another challenge entirely. Have your loan professional consult with both real estate agents, a;ways.
Down Payment – If you meet the income limitations you may be able to obtain a 3% conventional loan. Otherwise, a 3.5 % down payment for an FHA Loan is pragmatic alternative. Looking at FHA, you can apply for an FHA Loan to acquire a home with as little as 3.5% down all the way up to the maximum conforming loan limit in the county in which you are buying. For example in Sonoma County, California the maximum FHA Loan Limit is $520,950 and the FHA will allow you to take a mortgage with that little of the down payment despite that size of mortgage.
Alternatively, if you’re looking a loan beyond $417,000 you would need at least 10% down for a Conventional Mortgage up to the max Conforming Loan Limit. Using Sonoma County, CA again as example same $520,950 loan limit applies.
If you desired loan is $417,000 or lower all you would need for conventional loans 5% down. The 3% down program that just became available through Fannie Mae and Freddie Mac contains, more stringent guidelines reducing borrowing power which is not conducive to giving you multiple options for maximizing your purchase potential in a competitive market.
Down Payment Assistance working with the down payment assistance program? Well while you might be qualified with the down payment assistance program, you will more than likely will have a very difficult time getting into contract especially against competing offers on the same property, with more skin in the game.
Closing costs expect to pay at least 2.5% of the purchase price in closing costs as additional cash beyond your down payment to acquire a home. Gone are the days of seller credits for closing costs, and thinking you have a chance of getting into contract. This does vary between markets, but is harder to come by as the economy is in recovery mode.
The reality of today’s market shows strong demand for housing coupled with little supply,which means competition. A seller credit for closing costs pre-approval is less strong and here’s why…. You are making an purchase offer to buy a home $400,000 with seller credit closing cost credit request of $10,000. The credit for closing cost of $10,000 results in the direct loss of net monies to seller. This means your offer is really $390,000. You might end up getting a seller credit based on an inspection of the property, or as result of new information during the process, but that would happen later on in the escrow process with your real estate agent’s guidance.
To buy a home, you will need access to cash, and make sure to have your financial house in order. Looking as strong as you can on paper does help increasing your odds of getting into contract on a home. One additional way to spruce up your offer is putting more cash down lowing your mortgage loan amount subsequently lowering your mortgage payment creating a long term manageable housing obligation that will last well into the future.
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