Buying a home is a tremendous financial and personal decision. Purchasing and financing a home comes with a lot of questions: Should you buy or rent? Just how much can you afford? Are you going to qualify for a purchase mortgage? Bills.com helps you make that process a lot easier, providing you with valuable information and essential tools to help you make the best financial decision.Get a Mortgage Quote Now
Can you afford to buy a home? Many households and especially millennials are pushing off their home purchase, due to financial concerns and changing lifestyles. Owning a home is often considered to be the American Dream. Did you know that homeownership rate dropped from 69% in 2004 to just 62% in Quarter II 2016? However, since the beginning of 2017 homeownership rates are rising.
Will homeownership have a comeback in 2018? One of the main problems is the lack of supply and rising home prices. According to CoreLogic Chief Economist, Frank Nothaft:
Entry-level homes have been in particularly short supply. ...Thus, first-time buyers are facing acute affordability challenges in high-cost areas
Home prices peaked in 2007 and then plummeted. According to the national Case Shiller HPI, home prices are above pre-Great Recession levels. However, home prices and trends vary very much from area to area. Don’t forget to research and shop around for a home.
To buy a home, it takes two to tango. Both you and the mortgage lender need to agree that you qualify for a mortgage?
If you want to qualify for a purchase home, mortgage lenders are going to pull out the alphabet soup and ask you about your FICO credit score, DTI, LTV, and your ability to repay the PMT. It can’t hurt your chances to qualify if you brush up on mortgage basics and mortgage terms.
Lenders look at your credit score, credit history, income and the amount of money you pay on your debt, and how much down payment you have. Your credit score is crucial. Although there are many different loan programs and minimum credit scores, many lenders have stricter requirements.
Do you want to improve your chances to qualify for a mortgage? Then, take these actions: Prepare your finances, check out your options, shop around and get prequalified.
A common problem for many potential borrowers is the cash required for down payment. What are your options? Many people rely on gifts, while others look for a down payment assistance program. Lenders will check your source of funds. If gifted, make sure that you do it the correct way.
But, even if you don’t come up with a lot of cash, there are are many low down payment mortgage loans. One of the more popular purchase loan choices is the FHA loan, which offers up to 96.5% financing. That means if you purchase a home for $200,000 you will need to come up with a $7,000 down payment.
Another option is a conventional low down payment loan, combined with Private Mortgage Insurance (PMI). Both Fannie Mae and Freddie Mac offer low down payment loans up to 95% LTV. However, they also offer discounted Mortgage Insurance Rates for loans with only a 3% down payment.
If you are low on cash, then shop around and compare all of your offers. For example, FHA loans have lower credit score requirements and often lower mortgage insurance premiums. However, FHA loans have a steep upfront Mortgage Insurance fee (1.75%) and for high LTV borrowers, no cancellation. It is also a good idea to check if you qualify for a down payment assistance program, which can help to cover closing costs.
The home purchase mortgage market has a number of mortgage loan programs: FHA, Conventional (conforming), VA, USDA/Rural, Jumbo, and Non-qualified mortgage. When shopping for a loan keep in mind that some programs are designed for a unique set of borrowers, such as the VA loans for veterans with an eligibility card. USDA/Rural mortgages have both area and income restrictions.
You can compare the various loan programs by their credit score, DTI, and LTV requirements. You also need to check the payment plans, interest rates, fees, and mortgage insurance requirements. While most first time home buyers (FTHB) take out a 30-year Fixed Rate Mortgage (FRM), some might prefer a 5/1 or 7/1 Adjustable Rate Mortgage.
FHA loans are notorious for their low credit score requirements. For example, you are required to have a 500 score or higher to qualify for a loan that has an LTV 90% or less. You only need a 580 to be eligible for a higher LTV loan. Caveat: Lenders often have higher credit score requirements. FHA purchase loans are available with a down payment as low as 3.5%. However, FHA loans require an upfront Mortgage Insurance Payment, as well as monthly Mortgage Insurance Payments. If your loan is over 90%, then the mortgage insurance is not canceled for the duration of the loan.
Conforming loans are the most popular mortgages, especially since the 2008 Housing Crash and demise of the subprime mortgage market. For many areas conforming loans have higher upper loan limits. Conforming loan guidelines, as set by Fannie Mae and Freddie Mac, generally require a FICO score of at least 620, although lenders often have higher minimum credit score requirements. It is possible to take a conforming loan without mortgage insurance if you have a down payment of 20% or more. However, there are special mortgage programs with down payments as low as 3%.
One specialty purchase loan is the VA loan, which is available to US Veterans with a Certificate of Eligibility. The VA Web site has a description of eligibility requirements. Some unique benefits of the VA loan include lower interest rates, no mortgage insurance charges, no down payment loans, and looser credit requirements. Loan limits are a bit more complicated. The VA guarantees loans up to the amount set in the FHFA conforming limit guidelines. The basic entitlement available to each eligible Veteran is $36,000. If you qualify for a VA loan, then this is an excellent option to pursue before looking into other purchase loans.
The government also has a special mortgage program for rural areas. The USDA Rural Housing Service (RHS) Section 502 Guaranteed Rural Housing Loan Program serves rural residents. The program has income limitations, with the aim to help low to middle-income residents, which are generally significantly less than both FHA and Conforming loan limits. According to the USDA.gov website, "The program provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers”. The lender must validate credit files and scores. In general, a score of 640 or more is required.