You’re ready to buy a house!
If you’re like most of us, you’re just a little nervous about it – we all fear rejection of any kind. There are several things you can do to increase your chances of getting the financing you’ll need.
So here are 7 tips to help you get ready to buy a house.
1. Improve Your Credit
The first course of action when thinking to buy a house is getting your credit score as high as possible. Your credit score is one of the most critical factors lenders examine when determining whether you qualify for a loan or not.
You can save a ton of money by improving your credit scores. The higher is your credit score (720 and above), the better the loan terms the lender can offer you.
Your credit score directly influences the interest rate the lender may offer you. It ultimately affects your monthly mortgage payment – making the payment either affordable or out of your reach.
A higher score can also help you get more financing with a lower down payment.
In most cases, lenders may require a minimum score of about 620 for conventional loans and a minimum of 680 for Jumbo loans.
*Minimum credit score requirements may vary by lender and type of loan.
2. Increase Your Savings
Most people use financing to purchase a house. In addition to having good credit, having some money in savings will give you a better chance of securing a loan.
The reason is that there are a lot more costs and expenses than just the purchase price of the house – for example, property taxes and private mortgage insurance.
If you can show the lender that you have the wherewithal to cover these costs, they’ll be far more likely to loan you the money you need.
However, there are many misconceptions about how much money is needed to purchase a house.
There are three expense buckets to consider when buying a home –
1. Down payment – how much you need will ultimately depend on the type of loan and how much you can afford.
It is possible to purchase a house with no money down; however, it all depends on your creditworthiness, program availability, and eligibility requirements.
In general, it is possible to purchase a house with as little as 3% down.
2. Closing cost – Many people do not account for these expenses. Even if you qualify for a zero down payment loan or a down payment assistance program – borrowers need to have some money in savings to cover closing costs.
In my experience, here in Charlotte, NC, closing cost, on average, can range from 2% – 4% of the purchase price.
Closing costs are expenses related to the loan origination. Some of these fees are lender fees, appraisal fees, title work, attorney fees, prepaid homeowners insurance, flood insurance (if applicable), prorated interest expense and property taxes, etc.
3. Reserves – most lenders require the borrower to have at least two months of the mortgage payment as reserves in your bank account. For example: if your monthly mortgage payment is $1,000 per month, the lender may require you to have $2,000 left in your bank account after the down payment and closing cost are paid.
Not enough cash saved!
We all know and recognize that saving a big chunk of money to purchase a house is difficult for many and may take a long time to save. Well, for those of you that may be facing this ordeal, there are a few solutions. Here are some of them:
A monetary gift from family and friends – You use gifted monies from friends and families that may feel generous and want to help you make your dream of homeownership a reality. Your lender will accept those monetary gifts from family and friends to cover down payment and closing costs. Your lender will request a letter from the person gifting you the money stating the purpose of such a gift.
Adding closing cost to the loan – Another possibility would be if your lender can roll in some of the closing cost into the loan balance.
For example: if your loan is $100,000 and $10,000 in closing cost. Following the bank’s loan guidelines, let’s say that the lender is allowed to roll in $5,000 in closing cost into the loan. So now your loan will be $105,000, and the closing cost is $5,000.
But wait, I have another solution!
Seller to pay some closing cost – Your Realtor can negotiate on your behalf for sellers to cover some of your closing expenses. And what that means is that we can negotiate for the sellers to credit you a specified amount of money to help you pay for closing costs.
Ta da!!! well done!
3. Know What You Can Actually Afford
This one sounds obvious, but many people neglect to consider it. You do not want to be house-poor! Spending some time crunching some numbers may prevent this from happening.
The questing needs to be how much I can comfortably pay for housing expenses every month? This number should consider principal, interest, property taxes, homeowners insurance, and HOA (if applicable).
Debt-to-income ratio – is a calculation used by lenders to figure out the maximum amount you can reasonably afford. Some lenders may accept a DTI ratio as high as 50%. However, DIT requirements vary by lender, borrower’s financial circumstances, loan type, and other factors may be considered.
To calculate your DTI ratio, you need to gather all the monthly payments you make for consumer debt (personal loan, car payments, minimum credit card payments, etc). Add all these amounts that you pay monthly, divided by the total amount of income you receive monthly.
There are many home affordability calculators available online to help you figure out how much you can afford. The general rule of thumb is that your home should cost no more than 2.5 times your annual income.
4. Get Pre-approved
Ok, now you are ready to take your next step, which is to get pre-approved by a lender.
Pre-approval will let you know the range of what a bank will be willing to lend you. It will also show the seller that you’re a serious buyer.
To get a pre-approval letter, you’ll need:
1. Fill out an application with one or more lenders – Myth buster here: “I don’t want to apply to multiple lenders because it affects my credit scores” This is a misconception that many people have.
Applying with different lenders and shopping for the best rates and terms is highly recommended. As long as you apply with different lenders within a short time window (generally 30 days), it will not negatively impact your credit.
2. Provide lenders with required documentation. The documents mostly requested are:
– Bank statements
– Filed tax returns (if self-employed)
– Pension, disability or Social security award letter
– Other based on individual cases
Yay! You are one step closer to your dream house! (Ok gaining composure)
5. Consider All Mortgage Options
When you want to secure a loan in Charlotte, keep in mind that you have several options.
You’re not limited to just choosing between a 15-year and a 30-year mortgage, a fixed-rate mortgage, and an adjustable-rate mortgage.
There are many types of loan programs available, and identifying the most financially beneficial to you is critical.
The most common loan programs are:
Conventional loans – AKA conforming loans. This type is more beneficial to borrowers with higher credit scores (at least 620). You can get this type of loan with as little as 3% down.
FHA Loans – Lenders are more flexible in their qualification requirements because these loan products are backed by the Federal Housing Administration. The greatest benefit of this type of loan is that it is easier to qualify for with lower credit scores (at least 580) and minimum down payment as low as 3.5%.
VA loans – This type of loan is geared for veterans, active-duty members of the Armed Forces, and qualifying surviving spouses. VA loans are backed by the Department of Veterans Affairs and are offered with zero down payment. Additional requirements and fees may apply.
USDA Loans – This is another zero-down payment loan program. However, this loan program is limited to certain eligible rural or suburban areas and subject to income limits. USDA loans are backed by the Department of Agriculture.
6. Be Patient, Then Pounce
You certainly should take plenty of time to shop and find exactly the right home that falls within your price range.
Rushing is almost always counterproductive. But since you know what you can afford and you’ve been pre-approved, you should act fast once you’ve found the house you want. That way, neither the lender nor the seller will have time to have second thoughts and back out.
7. Jump Through the Final Hoops
Finally, be aware that there will be a lot of paperwork and a lot of hoops to jump through to secure a loan to buy a house, especially near the end of the process.
Your lender will have to have an appraisal done and pick your finances with a toothcomb before they can officially hand over the cash.
If the appraisal falls short of the sale price or the inspection turns up major problems, you have to negotiate a lower price for the house. A title search will also have to be performed before you can close.
Dealing with banks and other mortgage lenders can be both intimidating and frustrating. But these tips will help you pave the path and move you much closer to your homeownership goal.