What are the terms of buying a house?
As a first-time home buyer, the question you should ask yourself is, “Do I qualify for a mortgage?” If you do, you are likely in good shape to buy a home.
This starts with knowing your home loan options, as well as the minimum qualification requirements. Lenders will look at your credit score, income, savings, debt, and documents to see if you qualify for a mortgage.
The good news is that meeting these requirements is likely easier than you think.
Find out if you qualify for a mortgage (January 15, 2022)
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Credit requirements for buying a home
Believe it or not, you don’t need a high credit score to get a mortgage. Different mortgage programs have different credit requirements, and sometimes you can qualify with a credit score as low as 580.
Keep in mind, though, that a lower credit score often means paying a higher mortgage rate.
In terms of minimum credit requirements for buying a home, here’s what to expect:
- Conventional Home Loan: Minimum credit score 620
- FHA Home Loan: Minimum credit score of 580, although some lenders may allow a score as low as 500 with a 10% drop.
- USDA Home Loan: Minimum credit score 640
- VA Home Loans: The US Department of Veterans Affairs does not set a minimum credit score, but most lenders require at least 620.
To be clear, just because you are can Qualifying for a low-grade mortgage does not necessarily mean that you will.
Lenders take more than your score into account. They will also review your credit reports, paying close attention to your most recent credit history.
In general, to qualify for a mortgage loan—even with a low credit score—you can’t have any delinquent loans or late payments on your credit report in the past 12 months.
This is not a hard or fast rule, though. So you may still be eligible to make one or two late payments in the past 12 months, but only if the lender accepts your explanation for the delay.
Also, there is usually a waiting period for a mortgage after bankruptcy or foreclosure. These waiting times vary depending on the home loan program. For example:
- conventional loan You must wait four years from the date you were released after Chapter 7 or 11 bankruptcy, and two years after Chapter 13. The usual waiting period after foreclosure is seven years, or three years if you have extenuating circumstances
- FHA Loan You must wait two years from the date of your release after Chapter 7, and one year after Chapter 13. There is no waiting period after a Chapter 11 bankruptcy. You must wait three years after foreclosure
- VA loan – You must wait two years from the date of exit from class after Chapter 7, and one year after Chapter 13. There is no waiting period after Chapter 11. After foreclosure, the waiting period is two years
Although lenders will look at your credit history and credit score, it is possible to obtain a mortgage without a credit history.
Some loan programs, such as the FHA, Housing Administration Experts, and the USDA, allow non-traditional credit to be used in a mortgage application. You can demonstrate creditworthiness through things like utility payments, rent payments, insurance payments, and mobile phone payments.
Even some traditional lenders will accept a 12-month history of rent and utilities payments instead of a credit history, but not all.
Check your eligibility for a mortgage (January 15, 2022)
Income and business requirements to buy a house
Besides credit, fixed income and employment are other big requirements for mortgage approval. The lender must confirm that your income is stable and sufficient to withstand the mortgage payment.
For this reason, most lenders require 24 consecutive months of work before approving a home loan application.
This also applies to self-employed mortgage borrowers, in which case you will be filing your corporate tax returns and personal tax returns for the past two years. Income statements must show consistent income over the past 24 months, either staying roughly the same or increasing.
There is no minimum income for a mortgage, but some loan programs have a maximum income.
Because a self-employed borrower’s income can fluctuate from year to year, mortgage lenders often average their income over a two-year period, and then use that number for qualification purposes.
Also consider the potential income requirements for the type of loan you want. Usually there is no minimum Income requirements, but some programs have income limits.
With the USDA, for example, total household income must be at or below 115% of the region’s median household income. And if you apply for HomeReady from Fannie Mae or Freddie Mac’s Home, your income must not exceed the limit set for your region.
Savings on down payment and closing costs
Buying a home also requires meeting a minimum down payment.
With a conventional loan, you can expect to pay a minimum down payment between 3% and 5% of the purchase price. The minimum FHA loan, backed by the Federal Housing Administration, is 3.5%.
Home loans from the USDA and the Department of Veterans Affairs do not require a minimum down payment. (Yes, that means you can buy a home for as low as $0 if you qualify.)
These days 20% discount is not required. But some borrowers choose a 20% discount to avoid the monthly cost of private mortgage insurance (PMI).
However, your down payment isn’t the only upfront expense. You are also responsible for closing costs.
If you are having trouble saving money, you may qualify for the Down Payment Assistance Program. Ask a loan officer, realtor, or real estate agent about local DPA programs.
The seller may pay some closing costs. Sometimes, mortgage lenders give credit to cover the borrower’s closing costs, in exchange for a higher mortgage rate.
But on average, expect additional closing costs to be 2% to 5% of the loan amount.
This means that if you make a low down payment of 3%, the total amount of money you need to save will be more like 5% to 8% of the selling price when the upfront fees are added.
If you are having trouble saving money, you may qualify for the Down Payment Assistance Program. These programs provide funds in the form of grants or loans, which you can use to pay your down payment and/or closing costs.
Some down payment assistance programs have family income limits. But many are indulgent, aiming to make the home-buying process more affordable—especially for first-timers.
Check your eligibility for the low down payment (January 15, 2022)
Debt requirements to buy a home
Your existing debt will have an impact on the amount of the eligible loan, and therefore on your home purchase budget.
High debts (such as credit card debt, student loans, and other installment loans) can sometimes prevent you from qualifying for a mortgage. On the other hand, low monthly debt can help you buy a more expensive home.
The mortgage lender will calculate the debt-to-income ratio (DTI) to determine the eligible amount. DTI is the percentage of your total monthly income that goes toward your minimum debt payments.
Lenders look at the money left after you pay off your regular debt to see how much you can afford to make your monthly mortgage payment.
The ideal DTI for different mortgage programs is as follows:
- 36-43% for conventional loan
- 43% for an FHA loan
- 41% of the USDA loan
- 41% for a VA loan
Some lenders allow higher rates, though, if you have “compensating factors.” They include an excellent credit score, a large down payment, or high cash reserves.
Ideally, your mortgage payments on your new home should not exceed 28% to 31% of your gross monthly income.
Also note that other home ownership costs — such as home insurance and property taxes — will be included in the debt-to-income ratio. A good mortgage calculator will help you estimate these costs to find out your “true” eligibility.
Check your eligibility for a mortgage (January 15, 2022)
Documents needed to buy a home
Buying a home also requires documentation for your lender. Besides giving the lender permission to check your credit history, you will need to provide the following list of documents:
- Tax returns, payroll income, and W-2s for the past two years
- Job proof letter
- Bank statements and information about other assets
- Photo ID
- Rental date
- Profit and loss statement from year to date, if you are self-employed
Depending on your circumstances, you may submit other documents as well.
If a family member is going to provide you with your down payment and closing costs, for example, you should provide a gift letter.
This provides information about the donor and the amount of their gift. And if you are using alimony or child support payments for qualification purposes, you will provide copies of the court order.
Gathering these documents before applying can help the process go through more quickly. But, if you’re not sure what you’ll need, don’t worry – your mortgage advisor will walk you through the process step by step.
Get pre-approved for a mortgage
You can take a look at the general requirements for buying a home on your own, and see if you qualify based on your finances.
But your mortgage lender gets the final say. So when you’re ready to get serious about your purchase, your first step is to get pre-approved for a mortgage.
Some homebuyers make the mistake of shopping for a property before meeting a lender. But with pre-approval, you will know what you can afford before starting the process.
This way, you only look at homes that fall within your price range. In addition, a pre-approval letter indicates that you are a serious buyer. In this case, the seller will pay more attention to your offer.
When getting pre-approved for a mortgage, contact at least three mortgage lenders to compare interest rates and terms.
Homebuyers can often lower their monthly payments and save thousands just by shopping and lowering their prices.
Check the new price (Jan 15, 2022)