Whatever the market, you will want to buy a home as soon as you find the right one. However, it is not always that straightforward. Many financial factors will influence whether you can purchase the house, as well as the terms of your mortgage. It is easier to navigate the home buying process if you are familiar with the requirements to buy a house.
KEY OUTCOMES When it comes to buying a house, there are several key requirements that will need to be addressed before securing a mortgage. For buyers of a home, it's essential to make a down payment, have a good credit standing, and have a cceptable debt-to-income ratio. In addition, buyers must be prepared to pay closing costs, which are due before final papers on the home are signed. You need to ask the lender what documents they will require to ensure your loan application goes smoothly.
Requirements for Purchasing a Home Buying a house usually requires getting a mortgage. 93% of first-time home buyers finance their purchase, while 83% of repeat buyers do so.
Every buyer's mortgage process differs. Getting a home loan typically involves checking off six boxes;
An up-front payment In the lending industry An analysis of credit reports Credit-to-income ratio Costs associated with closing Reference material
The down payment An initial down payment is required to purchase a home. You pay this amount upfront to offset the amount you must borrow.
Based on the type of loan you intend to obtain, you may need a down payment of a certain amount. FHA mortgages, for example, require a down payment of 3.5%.
Lender: one who lends money As a borrower, your choice of lender can affect the interest rate you pay. You will pay less to buy a home overall if your interest rate is lower. It is therefore important to shop around and compare mortgage lenders.
The first thing you can do is talk to your own financial institution (FI). Because you already do business with them, you may qualify for a competitive rate. Consider credit unions, local banks, and online lenders as well. A really good rate is more likely to be found if you check several lenders.
The mortgage calculator can be a very useful tool to compare interest rates. Before you meet with a mortgage broker, this tool estimates your potential costs.
The third point is credit score A mortgage lender takes your entire financial situation into account when considering your loan application, but your FICO score can take center stage. Credit scores serve as a measure to lenders of your ability to repay loans. If you have bad credit or no credit history, you will have trouble qualifying for a mortgage.
How high of a credit score do you need for a mortgage? Once again, the answer depends on the type of mortgage you are seeking.
Radius Financial Group loan officer Amy Tierce says that although the Federal Housing Administration (FHA) offers financing options to borrowers with a credit score as low as 500, most lenders have their own requirements.4 So it may be a challenge to find a lender who'll work with a borrower with a credit score below 620 or 640.
Taking a look at your credit score before applying for a mortgage can help you understand whether you meet your lender's requirements to buy a house. The interest rate you're likely to pay for a mortgage can also be gauged through this process.
Debt/Income ratio The debt-to-income ratio or DTI indicates what share of your income goes toward debt repayment. To get an idea of your debt payments, you can add up all your monthly debt payments and divide it by how much money you make each month. In this case, the lower this number is, the better for meeting the requirements.
Amounts related to closing Fees and charges associated with closings are closing costs. A mortgage is not finalized if the fee is not paid and the loan documentation cannot be signed. A typical closing cost may include:
Fees for credit reports An application fee is required Registries fees Fees associated with title insurance Fees for underwriting and processing Expenses associated with closing The escrow fee Fees charged at origin The interest that was prepaid Fees for surveying During the closing process, your lender will give you an estimate of what you will have to pay. Closing costs usually range between 2% and 5% of the purchase price of the home.6 So if you are buying a $300,000 home you might pay anywhere from $6,000 to $15,000 at closing.
Consider down payment and closing cost assistance programs that may cover some or all of these expenses. Your budget for home buying must include a line item for closing costs if you do not qualify.
The documentation phase It will make the mortgage process much smoother if you have all your ducks in a row before you apply. The wrong documentation can stall or even stop the loan approval process, so find out what you have to bring to the table.
The lender should have a comprehensive request for documentation depending on your employment and income situation, “If you are starting with a pre-approval, be sure that the lender asks for all documentation for the process since a pre-approval without thorough documentation review is useless. It is possible to miss something that may result in your loan being declined later if the pre-approval process is not extremely well documented.”