In this article I’ll go through a list of 4 must-haves that everybody needs to have if they want to buy a house.
Buying a house isn’t as easy as it used to be. The days of no-documentation or low documentation loans are all but gone.
And with good reason, as they are partly the reason why we got into this mess in the first place. There was a bunch of people who were allowed to buy homes they could not afford. The banks knew it but they couldn’t care less because they were selling their loans and pocketing all the profit with no risk.
Then the collapse came as people’s adjustable interest rates started adjusting and their payments skyrockets. With that, foreclosures skyrocketed as well.
But now it’s a bit different. Things are slowly beginning to change. Now is a good time to invest in real estate (or buy your first home) if you have all of the right pieces to this real estate puzzle.
Before you even begin to consider buying a house there are some reality checks one must face. Here are 3 things you need to buy a house.
A Good Credit Score
If you want to make your dreams of owning your own house come true this year the first thing you want to make sure of is that your credit score is in order. Let me be more blunt: you need a good credit score to buy a house in 2018. The better your score, the better the rate, after all.
What’s considered a good credit score?
The absolute bare minimum credit score to qualify for a mortgage is 620. However, to secure the best rates, you need a score of 740 or higher.
If your credit score is below this number, you have several options:
- Wait. While this can take a while, it may be best to wait to buy a house until your credit has improved.
- Get an FHA loan instead. For an FHA loan, you need a score of at least 500 to go along with a 10% down payment. (If your score is over 580, then you’re only required to put down 3.5%) The downside of an FHA loan is that you have to pay a monthly mortgage insurance premium on top of your mortgage payment.
If you have bad credit, don’t despair, there other factors that can help you qualify for a mortgage. These are:
- A low loan-to-value ratio. You can achieve this by making a higher down payment. If you want a $200,000 house and can make a $50,000 down payment, it shows you are more committed to making the payments on the property.
- A big savings account. The more money you have saved up, the better.
- High income. Even if your credit is bad because of past mistakes, you can overcome it if you show you make a lot of money.
- A low debt-to-income ratio. If you don’t have much (if any) credit card debt, yet good income, it shows you will be able to handle the new mortgage payment.
- A long history of employment. If you’ve been working at the same place for over 10 years, odds are your job is pretty safe. This goes a long way toward showing future income stability.
Have Verifiable Proof Of Income
When you’re applying for a mortgage the one thing you’ll need is a lot of proof. The lender will ask you for… just about everything.
Be ready to provide bank statements of every bank account you have, to show you have steady income. You’ll also be asked to provide recent pay stubs along with the last 2 years of tax returns.
You need proof for everything. So if you have side gigs which pay you cash, that income is not going to count.
This information you provide must back up the total income you claimed to earn. You will not qualify for a house if your income isn’t up to par.
To help you better qualify for a mortgage, you can combine your income with your spouse. But if you do, keep in mind that now both credit scores will be taken into account.
While income can be combined, credit scores are not combined or averaged. The lender will use the lower credit score of the two of you to calculate your interest rate.
Save For A Sizeable Down Payment
The days of buying a house without putting a down payment are long gone. Lenders want you to be committed to your home purchase. After all, if they’re letting you borrow a few hundred grand, they want to make sure you’re invested into the house too.
To buy a house, you need to make a sizable down payment to secure a mortgage.
It is advisable to put down 20% of the homes sale price toward the down payment. By doing so, you avoid paying the dreaded private mortgage insurance (PMI).
You pay PMI every month until you owe 20% of what your property is worth. Typically, PMI is 1% of the loan amount per year. So on a $300,000 loan, you owe $3,000 per year (or $250 per month). This money doesn’t benefit you and goes straight down the toilet.
If you don’t have 20% down payment, you have several options:
- Wait until you’ve saved up 20% down.
- Bite the bullet and pay private mortgage insurance.
- See if you qualify for something other than a conventional mortgage.
Other lending programs don’t require too much of a down payment:
- FHA loans require 3.5% if your credit score is at least 580.
- VA loans don’t require any down payment. Plus, there’s no monthly mortgage insurance to pay.
- USDA loans don’t require a down payment either. USDA loans are available for single family homes location in less dense, rural areas.
To Buy A House, You Need To Have Reserves
And lastly, banks will want to see that you have enough money in your reserves just in case you happen to fall into a financial setback.
It used to be a good rule of thumb to have at least up to 3 months of money reserves, but now just to be on the safe banks want to see that you have at least 3-6 months of reserves.
Here’s how you calculate how much is necessary to have in reserves.
You need to take your total proposed monthly mortgage payment and multiply by 6 for 6 months reserves.
Your mortgage payment may consist of the following: principal, interest, private mortgage insurance, homeowners insurance, real estate taxes and homeowners association dues. It really adds up!
For Fannie Mae and Freddie Mac loans, the amount needed in reserves vary depending on your credit score and the loan to value ratio. As a rule of thumb though, the riskier the loan, the more you need to have in reserves.
Other loan types, like FHA, VA and USDA don’t require reserves.
If you find yourself fulfilling all of the requirements to buy a house then you’ll be well on your way to owning your first home.