It's fun to look at new homes and dream about owning. But, before you start touring homes and making a wish list, it's a good idea to get your financing in order. The best way to start is by contacting a mortgage broker. He or she can help you determine how much house you can afford and also help you understand various loan programs available for you.
Below are some points to consider to make sure you are ready to buy. With the current market, homes are going fast. It's best to have everything in order prior to making an offer and even before starting your search. The strong, prepared buyers are the ones most likely to have an offer accepted.
Consumers often times believe that the minimum down payment required to purchase a home is 20%. There are actually programs out there that only require 3% to 5% down payment.
What does it mean to be a "first-time home buyer"? Many programs define a first-time home buyer as one who hasn't owned property in the past three years. Both Fannie Mae and Freddie Mac have loans that involve special low down payment programs.
Fannie Mae's HomeReady Mortgage Program
Freddie Mac's Home Possible Program
A FICO credit score is used for qualification of a home loan. FICO scores range from 300-850. It's very important to know your score. Some banks offer free access to your FICO scores. You can also get your score by going to www.myfico.com or www.annualcreditreport.com. (There may be a fee involved at some of these sites)
FICO Scores are based on the last 24 months.
The minimum credit score lenders require to make a real estate loan is 620.
The Federal Housing Administration (FHA) will accept 580
If you are a couple purchasing a home together, the lower of the two credit scores is the one that will be used for your loan application.
WAYS TO INCREASE CREDIT SCORE
Increasing a credit score, even 100-200 points, before applying for a loan can save a consumer tens of thousands of dollars in interest over the life of a loan.
A DTI is one way lenders measure a borrower's ability to manage the payments they must make every month to repay a real estate loan. The highest DTI ratio a borrower can have and typically still get a real estate loan is 43%.
How to calculate your DTI ratio
DTI ratio = total monthly debt payments / gross monthly income
What to include in your monthly debt payments
Child support payments
Minimum credit card payments
Student loan payments (sometimes student loan does not count)
Living expenses like food and entertainment are not included in the DTI calculation. Current rent is also not included.