Here Is The Biggest Obstacle First-Time Home Buyers Face And Its Not Credit Score

It is no secret the cost of housing is expensive. Rising rents, and a strong real estate market, make it harder for first-time buyers to get a piece of the American dream. 

Buying a home means getting yourself credit worthy in these four areas:

  • Credit
  • Debt
  • Income
  • Assets

If you do not know where you stand, get preapproved. If want to make an offer on a home, get preapproved. Notice a trend here? Getting your financial house in order should be priority number one if you intend on buying a home now or down the line. A preapproval involves having a lender make sure your credit score is sufficient, you have cash to close to purchase the home, your income supports the debt load plus your other liabilities, you have the financial character, and capacity to make the big-ticket purchase. While credit score, income and debt allowance are all important puzzle pieces, your cash to close reigns as “king”.

The Hard Reality– there is no more specific first-time home buyer programs available anymore. Contrary to what you might read, there is no mortgage loan programs tailored to first-time home buyers. All the first-time home buyer programs that were available have long since expired, like the buying energy efficient homes initiative, in exchange for tax credits offered in years past.

While there is a possibility of finding a county, state or HUD program to assist with down payment, the next order of business is coming up with closing costs which equates to just about 2.5% of the home price (not loan amount). Using $400,000 home example, that’s $10,000 needed just for closing costs independent of the monies used for the down payment. The challenge that first-time buyers face is having enough money both for the down payment and closing costs.

If you have an excellent credit score, but you don’t have the cash

Then your home buying project will get put on hold until you have enough monies to seal the deal

If you have very strong income, even with little debt, but you don’t have the cash

Then you’re still at square one

To purchase a home you’ll need at least a 3.5% down payment to get your foot in the door and enough income to support financing a high debt load due to financing a bigger loan size reflective of little cash in the deal.

Here’s a quick cheat sheet for total cash to close on various purchase price points:

  •  home price $200,000  down payment + closing costs = $12,000 needed
  •  home price $300,000  down payment +  closing costs= $18,000 needed
  •  home price $400,000  down payment +  closing costs=  $24,000 needed
  •  home price $500,000  down payment +  closing costs = $30,000 needed

These illustrations assume using a 3.5% down FHA Loan. Notice for every hundred thousand dollars in purchase price change on an FHA 3.5% down loan, the total cash to close increases by $6k. If you’re looking for a home in the mid range, for example home at $350,000 that would be an additional $3000 needed totaling $21,000 needed to close escrow on such a home. Put simply, for every $50k increment in purchase price, $3k more in cash to close is needed.

Mortgage Tip: A conventional loan with 5% down could be a better option for dropping private mortgage insurance in the future as well as avoiding FHA’s upfront mortgage insurance premium, a pricey 1.75% of the loan amount.

Don’t have the cash? Not so fast, here other practical money sources to consider for you home purchase

  • gift monies- an excellent source of funds used to buy a home as long as the money can be documented and paper trailed with an executed gift letter, no mortgage gift fund limitations
  • retirement funds- this includes stocks, bonds, IRA and 401(k) all of these accounts are acceptable sources for borrowing funds against should your financial situation merit doing so
  • cash value life insurance- another form of acceptable monies to procure funds from for your big purchase
  • security deposit rental- as long as this money can be documented, and you have a working relationship with your landlord these monies are acceptable
  • changing jobs-changing jobs is not a lending will red flag like it used to be and in fact, making the plunge could be to your advantage if you can generate more income to enhance your savings rate

Home Lending Is Getting Easier

The mortgage requirements for buying a home are loosening. Buying your first home should be done when you can support a mortgage payment and have the monies necessary for the big ticket upgrade. If you don’t have the money saved up, or if you don’t have access to the funds, or if the project is on the longer term projection that’s okay as long as you’re doing everything you can do better your financial position by continuing to save, while keeping debts low and manageable.

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