Getting a Home Loan: The Three Basics

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+.

If your credit needs some help, check out these guides here and here.

Home ownership is both financially and personally rewarding. Three years

Photo by Scott Webb

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.

4 thoughts on “Getting a Home Loan: The Three Basics

  1. Hi,I leased  a house 4 years ago and u been paying the mortgage from my checking account every month ,i have the option to buy the house of the amount to pay off their loan because i paid $8000  dollars down .anyways Can i get a loan to buy it or they will askfor an other down paymentFyi : the house worth 253 and i did someupgrades,counter tops,wood floor,newroof….new furnace ..and the pay off is 112 k.i have 682 credit score and i make 60 k ayear .thx 

    Sent from my Samsung Galaxy smartphone.

    • If you are purchasing the house from a family member, you could do “gift of equity.” If not, then you might be able to use a portion of the rent toward the down payment, depending on the lease agreement and on the average price of rent in the neighborhood. Your credit score is good enough for a FHA loan. What you need to do is find a mortgage broker who is licensed in your state and speak with him or her about your situation.

  2. Hello Carolyn,
    I live in Portland, Oregon and I am looking to refinance my home. Would you be able to recommend a broker in my state?

    Thanks,
    Brian Puncocher

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