Owning a home has long been a dream for most Americans. Although home prices have been trending upward in recent years, it’s not impossible for buyers of all ages and income levels to accomplish such a feat. Let’s take a closer look at what you will likely need to do to obtain your first real property.
How Much Do You Need to Put Down?
You may have heard that you need to put at least 20% of the purchase price down to obtain a mortgage. However, the truth is that you may be able to get a mortgage without any down payment at all. This may be true if you qualify for a USDA or VA loan, and in some cases, traditional mortgage lenders will be flexible when it comes to their down payment requirements.
You Don’t Necessarily Have to Make the Down Payment Yourself
One of the perks of obtaining an FHA loan is that you don’t have to make the down payment yourself. Instead, you can obtain funds from a friend, family member or any other adult who is willing to help you. In fact, money gifted by another person can be used to pay off other closing costs that you might incur.
It’s also worth noting that you might qualify for local, state or federal down payment assistance programs. These programs may offer up to $10,000 or more toward the purchase of a first home. Your lender might also provide credits or other forms of assistance to make it easier to qualify for a home purchase.
Pay Off as Much Debt as Possible Before Applying for a Loan
Ideally, your debt-to-income ratio is less than 50% before you start the process of buying a home in Maryland. This is because most lenders won’t work with borrowers who have a DTI of 50% or more. If you are in the market for a traditional loan, you’ll want to have a DTI of no more than 28% before accounting for your mortgage payment.
Typically, any balances that you’ll pay off in the next 10 months will be disregarded when determining your current debt load. For instance, if you only have three more car payments left, a lender won’t give that much thought when making a loan decision.
It’s worth noting that there is generally a gap between the date your loan application is approved and the date that you close on your home purchase. If you accrue any debt during this time, it may result in your lender revoking its offer to finance your home purchase. Ideally, you will hold off on any large purchases until after you close on the transaction.
Eliminating Debt Can Help Your Credit Score
Your credit score is another important factor that will determine if you are eligible for a home loan. Typically, traditional lenders reserve the best deals for clients who have a credit score of over 700. However, you should be able to get a loan with a score of 640 assuming that you have a 20% down payment.
If you are applying for a USDA, VA or FHA loan, you may be approved for financing with a credit score as low as 500. Of course, you will likely need to have a down payment of at least 10% and abide by other rules that borrowers with higher credit scores don’t need to worry about.
Getting rid of credit card, medical or other types of debt can improve your score by up to 100 points. In some cases, getting current on a credit account can improve your score enough to qualify for a mortgage at a reasonable interest rate.
You’ll Need a Reliable and Verifiable Source of Income
A lender is going to need to see that you are capable of making mortgage payments over the next several years and decades. A lender will also need to feel confident that you have the financial ability to maintain and otherwise care for your home. In most cases, you’ll simply need to provide a copy of your most recent tax return to verify that you have a steady income.
However, if you earn income from royalties, rental properties or similar methods, that may be enough to qualify for a loan. It is important to note that lenders may average these types of earnings over the course of two or three years to determine your qualifying income. This is because self-employment, investment or other types of income aren’t always consistent. Therefore, a financial institution needs to make sure that this is taken into account when evaluating your home loan request.
Purchasing a house can be a great way to put down roots in a community and build wealth at the same time. Of course, the process of doing so is often a complex one. Therefore, it’s important to start preparing for a real estate transaction weeks or months before you plan on actually following through with it. This may help to ensure that you find the right house at the right price, and it can also help to ensure that you can take possession of the property before vacating your current home or apartment.