First-time home buyers are moving back into the housing market. Tired of paying rent that keeps going up every year, they’ve finally decided they’d like a place of their own.
So what is the first step?
Unless he or she has recently won the lottery, a first time home buyer will need to qualify for a mortgage. That means pulling a copy of credit reports from www.annualcreditreport.com (it’s free) and making sure the information in it is accurate.
Next, make sure it shows you to be a good credit risk. It will be helpful to know what your FICO credit score is. That’s usually something you have to pay for, but knowing your score before you start the process is worth the cost.
A credit score of 740 or higher is considered excellent and will qualify for the best rates. But as recently as 2014, a third of the people qualifying for mortgages had a credit score of 700 or lower. So a less than perfect score won’t disqualify you.
Next, consider your employment history. Lenders are adamant about requiring all borrowers to show at least two years of uninterrupted employment, either with the same employer or in the same industry. Unless you have that, don’t both applying.
Next, you’ll need a down payment and closing costs. This has proven to be an obstacle for some who are paying high rent. The U.S. government-backed FHA loan requires only 3.5% of the purchase price as a down payment, so for many first-time buyers, that’s the loan of choice.
With an FHA loan, if you are looking at homes costing around $150,000 you will need $5,250 as a down payment, plus closing costs.
Finally a lender will look at your income-to-debt ratio. That’s how much you already owe, for things like credit cards and student loans, compared to how much you earn.
For example, if you are applying for a mortgage that will cost $1500 a month, that amount is added to all of your existing debts and divided by your monthly income. The number should be no higher than 43%, since that’s the highest possible for a “qualified mortgage” that can then be sold. Some lenders will require a lesser percentage.
Once you have all those numbers, it’s time to talk to a mortgage loan officer. He or she will take your information and tell you if you may qualify for a mortgage – and if so, for how much. That will determine of the price you can pay for a home.
The mortgage officer will generate a letter to that effect, which your Realtor will want to see before he or she starts showing your houses. The letter is not a guarantee you will get financing, but it shows you appear to be a good risk, and could be on your way to becoming a homeowner.