Here are three things you must have to buy a home in today’s competitive real estate market…
$20,000 of 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 $20,000 to buy a home successfully. $10,000 as a down payment and $10,000 going towards closing costs is the ball park range you need to be in to be taken seriously in a competitive offer situation. 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 towards the down payment as you need at least a 3.5% down payment to buy a home. On a $400,000 single-family home the down payment would be $14,000.
In this scenario $6k would be going towards the closing costs which would mean you’d need another $4k coming 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 offer more to effectively finance any shortfall on the needed cash. While 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 a home at say $300k, you would still need at least $20,000 to put in without asking for any credits or concessions in the transaction. The offers that stand out are strong, with no concessions.
620 credit score or better-this gives you more options both for an FHA Loan and a Conventional Loan to the max county loan limits. In Sonoma County, California 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.
Manageable Debt Ratio-typically pegged at 45% or lower, although on some FHA Loans can even go as high as 52% oddly enough. 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 ratio loans with FHA 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 reoccurring debt obligations plus a proposed mortgage payment and those two things should not generally be more than 45% of your gross income. If they are higher than this 45% mark, you may still be able to qualify for the loan, but if you can’t, you could always pay off debt to qualify, buy less, borrow less or look at taking a lower rate of interest generating a lower proposed housing payment.
All three things are of equal importance, one will not offset the other. If you don’t have the cash at the moment for example, but have it at a later date, tell your mortgage company. If you have additional funds to increase the credit score and that 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 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, as in almost every housing situation you’re going to be going up against competitors gunning for the same home coming in stronger than you. Ultimately, if you are deficient in one of these areas, that’s okay. A quality mortgage professional can look at your financial picture and give you an action plan of things to accomplish, making you more ready for the big ticket purchase in the future.
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