When I purchased my little white house with smelly carpet and beat-up walls, I felt a sense of power and accomplishment nothing could ever take away. This place was mine! I tore out the carpet, painted, and turned a run-down place into a charming bungalow. I’ve been a fan of home ownership ever since.
If you would like to stop renting and own your own home, here are the three basics you need to qualify for a mortgage.
BASIC 1: Income
You need to be able to afford the new house payment as well as all of your current monthly obligations.
For monthly obligations, the lender goes by what shows on your credit report: auto loans, student loans, any other loans, and credit card minimum payment due. Do not include cell phone, transportation costs, or food.
Use your gross income, before any deductions. Use the minimum payment required, even if you pay more. The debt-to-income ratio (DTI) must be under 50% for conventional and FHA loans. (VA can sometimes go higher.)
BASIC 2: Down Payment
You will need 3% of the purchase price for the down payment on a conventional loan. 3.5% for FHA. 0% for VA.
If the purchase price is $300,000, then $9,000 down payment is the minimum for a conventional loan.
There are down payment assistance programs, which vary by state. Your mortgage broker can advise you on qualification and availability.
In addition to the down payment, there are closing costs. Closing costs can be paid by the buyer, the seller, or a combination.
Down payment and closing costs can also be a gift from family.
BASIC 3: Credit
Credit requirements have become stricter due to the effect of the pandemic on the economy. Most lenders are looking for a credit score of 680+ now. The credit score used is the middle score from the three credit bureaus. The lowest score is thrown out.
There are exceptions, of course. People with large down payments can get a loan with a lower credit score, depending on the lender.
For the best interest rate, you want a score of 740+.
Home ownership is both financially and personally rewarding. Three years
after purchasing the little white fixer, I sold it for a profit and purchased a nicer home in a better neighborhood. Making the effort to save money and establish clean credit is very much worth the work and patience.