Do you want to buy a house this year? Not sure if you qualify to buy a home? I will help you understand how to buy a house and how to know if you qualify to buy a house.
Knowing if you qualify to buy a home is very important, but you also need to know the process of buying a home. This way you can be prepared for each step of the process.
The Process of Buying a Home
First, we need to go over the process to buying a house. I have taken the main points from my article “Path to Homeownership” to come up with this list.
- Find a Good Lender
- Get Preapproved
- Decide on a Budget
- Find a Good Local Realtor
- Make a Needs and Wants List
- Decide on a Location
- Research that Location
- Start Your Home Search
- Find Your Dream Home
- Make an Offer
- Hire a Good Home Inspector
- Find a Good Home Insurance Provider
- Avoid All Credit Purchases
- Closing and Moving
This is just a list of how the process works, if you want more detailed information about the process to buying a home, I encourage you to read my article “Path to Homeownership”, I explain each of the fifteen steps in that article. I also have, in my Resources section of my website, a downloadable Home Buyers Check List and Home Buyers Vocab. I encourage you to check them out as well.
How to Qualify to Buy a Home
Now that you know the steps of the process of buying a home, we can go over what it takes to qualify to buy a house.
There are few steps involved in qualifying to buy a house. I will go over each of these steps and set you up to be in the right position to buy a house.
Down Payment Requirements
This will greatly depend on the type of loan you are using to purchase the home. Most people think they have to have 20% down to buy a home, but this is not true. There are other loan options when buying a home.
An FHA loan allows you to have a down payment of 3.5%. This is a great option for first time home buyers, but it is not limited to first time home buyers, anyone can use an FHA loan.
Fannie May and Freddie Mac
Fannie May and Freddie Mac options allow you to have a down payment of only 3%. These loans are not offered at all mortgage companies or banks, you will need to check around to find a lender that provides these types of loans.
This is a great option with a 0%, that’s right ZERO percent down! The catch here is that the home that you want to purchase must be located in a Rural Area. You Realtor or Loan Office can help you determine what areas qualify for the USDA loan option.
This is another great option with a 0% down payment. This time the catch is that you have to be a veteran or in active military status to qualify. You will also qualify if you are married to or a widow of a veteran.
A conventional loan is one of the most common loan products. Conventional loans require a 5% to 20% down payment. Occasionally some lenders will run a special loan campaign that offers as low as a 3% down payment.
The best thing to do is to find a good lender, possibly your own personal bank and start asking questions to see what they offer. This way you will be able to determine what loan is best for you.
Credit Score Requirements
This will depend on what type of loan you are using and which lender you go to. The magic number that you may have heard in the past is 620. The is the lowest score required by most lender on most loan products.
Don’t have a score of 620 or higher? Don’t worry there is still an option available to you.
With an FHA loan you can have a credit score as low as 500, but you will be required to put 10% down. If you still want to utilize the 3.5% down payment you will need a credit score of 580 or higher.
In general, the more income you have the higher the loan can be, but there is more to it then that. Lenders will be looking at your Debt to Income ratio.
Most lenders will allow your debt to income ratio to be as high as 36% on a conventional loan.
You can go up to 41% if you are using an FHA loan.
This means if you bring in $4,000 a month your debt payments must be $1,440 or lower to meet the 36% debt to income ratio. If you go with an FHA loan that will allow you to go up to 41% you can have up to $1,640 in debt payments each month on a $4,000 a month income.
Additionally, your loan can only make up 28% of the debt to income ratio unless you go with an FHA loan then it can make up 31% of your debt to income ratio.
Out of Packet Cash Needed
There are other costs, other than down payment, involved in buying a home that you will have to pay out of pocket. Some of these will be all wrapped into your final closing costs and some will be paid at the time of the service.
The cost for a home inspection must be paid at the time of the service. The cost for a general home inspection will vary by location and the size of the home you are buying. In most areas the cost will be between $200 and $500.
If you add other inspections to the general home inspection, like Radon, Mold, Termite, Well and Septic you will have to pay extra for these services. The best thing to do is to call around and get pricing in your area for any of these services you might need.
The home you are buying will have to be appraised if you are using a loan to purchase it. This give the lender the ability to determine if the value of the home is high enough o cover the loan on it. Appraisals also help buyers to understand home much their home is worth compared to what they are paying for it.
On average the cost for a home appraisal will be about $300 to $400. Some lenders will require you to pay this upfront and some lenders will allow this fee to be paid at closing.
You will have to prepay some of your home insurance even if you are escrowing your taxes and insurance payments. This fee will be paid at closing. The cost will depend on the type of home, size and age of the home.
An average single-family home in my area will be around $900 a year for home insurance. You should not need to prepay more then half of the yearly amount.
This will make up most of the closing cost outside of the down payment. Lender fees will be paid at closing. All lenders are different and have different amounts for each fee they charge. Make sure you ask upfront what the fees will be so you can plan out your finances for closing.
On average lender fees will be about 2-5% of the loan value. So, for a $150,000 home your lender fees will be between $3,000 and $7,500. I usually see around 3% for lender fees. Again, this is separate from your down payment.
What if you don’t have that much money?
Don’t worry there are options available to help with these costs. Some fees like home inspection, you will have to pay yourself at the time of the inspection, but other fees you can get help with.
You can ask the seller to pay part of your closing costs for you. This is a very popular option that I see on most transactions I do. The downside of this method is that you may end up paying more for the home by asking the seller to pay for your closing costs. Trust your Realtor to get a good deal for you.
You can also have some or all your closing costs wrapped into the loan. This is not something I usually suggest but it is an option. The reason I don’t like this is because you are ending up paying interest on the closing cost this way. It will take more then a year of payments just to pay off the amount you added to the loan, but if you have no other way to get the home this is an option you can use.
The best thing you can do when you are thinking about buying a home is ask questions. You can leave me a comment or send me an email with any questions you might have. You should also contact a good local Realtor, if you are looking for a home in North East Ohio check out my company website OhioRealEstateProfessionals.com to search for homes.
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