[READ-A-BIT Blog] Financing Your Home Purchase
IF YOU’RE LIKE THE VAST MAJORITY OF HOME BUYERS, FINANCING YOUR HOME PURCHASE WITH A MORTGAGE LOAN WILL BE THE LIKELY OPTION FOR YOU. By preparing in advance, you can avoid the common delays and roadblocks many buyers face when applying for a mortgage.
The requirements to secure a mortgage may seem overwhelming, especially if you’re a first-time buyer. Follow these three steps to begin laying the foundation for financing your home purchase today!
STEP 1: CHECK YOUR CREDIT SCORE
Your credit score is one of the first things a lender will check to see if you qualify for a loan. So it’s a good idea to review your credit report and score yourself before you’re ready to apply for a mortgage loan to begin financing your home purchase. If you have a low score, you will need time to raise it. Sometimes fraudulent activity or erroneous information will appear on your report, which can take months to correct.
The credit score most lenders use is your FICO score. Base FICO scores range from 300 to 850. A higher FICO score will help you qualify for a lower mortgage interest rate, which will save you money.1 Your FICO score is a weighted score developed by the Fair Isaac Corporation that takes into account your payment history, amounts owed, length of credit history, new credit, and credit mix.1
By federal law, you are entitled to one free copy of your credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and Transunion). Request your free credit report at https://www.annualcreditreport.com
Minimum Score Requirements
To qualify for the lowest interest rates available when financing your home purchase, you usually need a FICO score of 760 or higher. Most lenders require a score of at least 620 to qualify for a conventional mortgage.2 If your FICO score is less than 620, you may be able to qualify for a non-conventional mortgage. However, you should expect to pay higher interest rates and fees. For example, you may be able to secure an FHA loan (one issued by a private lender but insured by the Federal Housing Administration) with a credit score as low as 500.
Increase Your Credit Score
There’s no quick fix for a low credit score, but the following steps will help you increase it over time.3
1. Make Payments on Time
2. Avoid Applying for New Credit You Don’t Need
3. Pay Down Credit Cards
4. Avoid Closing Old Accounts
5. Correct Errors on Your Report
STEP 2: SAVE UP FOR A DOWN PAYMENT AND CLOSING COSTS
Down Payment
When you set up financing for your home purchase, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage). Many first-time buyers wonder: How much do I need to save for a down payment? The answer is … it depends. Generally speaking, the higher your down payment, the more money you will save on interest and fees.
For example, on a conventional loan, you will be required to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent. PMI is insurance that compensates your lender if you default on your loan.4 For a conventional mortgage with PMI, most lenders will accept a minimum down payment of five percent of the purchase price.4
FHA-insured loans are guaranteed by the Federal Housing Administration and only require a 3.5 percent down payment if your credit score is 580 or higher.4
There are a variety of other government-sponsored programs created to assist home buyers, as well. Veterans and current members of the Armed Forces may qualify for a VA-backed loan requiring a $0 down payment.4 Reservists and surviving spouses of veterans may also qualify for a VA loan.
Closing Costs
Closing costs should also be factored into your savings plan. Costs can range between two to five percent of a home’s purchase price. These may include loan origination fees, appraisal fees and other fees associated with the purchase of your home.5
STEP 3: ESTIMATE YOUR HOME PURCHASING POWER
Once you have the required credit score, savings for a down payment and a list of all your outstanding debt obligations via your credit report, you can assess whether you are ready and able to purchase a home.
It’s important to have a sense of how much you can reasonably afford—and how much you’ll be able to borrow—to see if homeownership is within reach. To get started, visit the National Association of Realtors’ free Home Affordability Calculator at www.realtor.com/mortgage/tools/affordability-calculator.
This handy tool will help you determine your home purchasing power. It also offers a monthly mortgage breakdown that projects what you would pay each month in principal and interest, property taxes, and home insurance. You will need to secure pre-approval from a mortgage lender to know your true mortgage approval amount and monthly payment projections.
Can I Afford to Buy My Dream Home?
Once you have a sense of your purchasing power, it’s time to find out which neighborhoods and types of homes you can afford. We help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your specific needs.
If there are homes within your price range and target neighborhoods that meet your criteria—congratulations! It’s time to begin your home search. If not, you may need to continue saving up for a larger down payment … or adjust your search parameters to find homes that fit within your budget. We can help you determine the right course for you.
START LAYING YOUR FOUNDATION TODAY!
It’s never too early to start preparing financially for a home purchase. These three steps will set you on the path toward homeownership … and a secure financial future!
And if you are ready to buy now but don’t have a perfect credit score or a big down payment, don’t get discouraged. There are resources and options available that might make it possible for you to buy a home sooner than you think. We can help.
Want to find out if you’re ready to buy a house? Give us a call! We’ll help you review your options, connect you with one of our trusted mortgage lenders, and help you determine the ideal time to begin your new home search.
Current Homeowners
If you are considering financing your home purchase, it’s a good idea to prepare in advance so you don’t encounter any surprises along the way. Lending requirements have become more rigorous in recent years, and changes to your credit history, debt levels, job type and other factors could impact your chances of approval.
You may have equity in your home that you can use toward your down payment and closing costs on a new home. We can help you estimate your expected return after we sell your current home and pay back your existing mortgage. Contact us for a free evaluation!
NOTE: The above reference is an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.
Sources: 1. myFICO 2. Bankrate 3. myFICO 4. Bankrate 5. Investopedia
