Today's topic relates to obtaining financing to purchase a home. As you may already know, it is certainly more difficult to get a loan to buy a home today than it was a couple years ago. The days of stated income loans and sub prime loans are about as dead as disco. This is probably good though since giving out loans to people who should not have been getting loans is one of the main reasons that our economy is in the dumps right now.
So how can you obtain financing in this tough economy? What are some loan options available to people looking to buy a home these days? What loan options do first time homebuyers have these days? These are all great questions, and I will answer all of these in detail.
First off, let's start with the basics of what you need to do to get a home loan. The main things that lenders are going to look for these days before they issue a loan is whether the potential borrower has the ability to make mortgage payments, and also is the potential borrower willing to make his/her mortgage payments. The lender will also look at how much of a downpayment the borrower is making on the home.
When the lender looks at the borrower's ability to pay, the lender is going to look at the borrowers income and expenses. Typically, the lender will not want to see mortgage payments exceed around 30% of the borrower's total income, and they will not want to see total expenses exceeding about 40% of total income. Those percentages are general guidelines, and they might deviate just a little depending on the borrowers credit score and whether or not the borrower is obtaining financing through a Conventional, FHA, VA loan or the USDA Rural Development Loan.
The lender is also going to want to see that you have held your job for 2 years. Again that is an average, the lender might be flexible with that number if your credit score is really high. If you are self employed, they might want to see documented income going back five years.
The other thing that the lender is going to look at is the borrower's willingness to make their mortgage payments. The best way to measure to a buyer's willingness to make their mortgage payments, is their credit score. Lenders are paying a lot of attention to credit scores these days. In today's market, you will need to have a minimum credit score of 620, but even at that score it may be difficult to obtain financing. You really should make it a goal to have a credit score of about 680 or more if you are serious about obtaining financing to purchase a home.
The requirement for credit score will be slightly different based upon what type of financing you are getting (Conventional, FHA, VA or USDA Rural development loans.) The credit score requirement will also depend on whether or not you a purchasing a primary residence, secondary residence, or investment property. The minimum credit score requirements for a conventional loan is about 680. For the other loans listed above it is somewhere around 620. Those two numbers are if you are buying a primary residence. If you are buying a second home or an investment property, the credit score requirements may be higher.
The third thing that lenders are going to look at when deciding whether or not they are going to loan you money to purchase a home, is the size of the downpayment you are putting on the home. If you get conventional financing, you are going to be required to put down 10% if you are purchasing a primary residence and 20% or more if you are purchasing a second home or an investment property. With FHA financing, you will will required to put down 3.5% downpayment on a primary residence. If you obtain financing through the VA or through the USDA Rural Developement Loan program, you don't have to put down any down payment. If you are a buyer who can make your monthly mortgage payments, but you do not have a lot of cash for a down payment, FHA, VA and the Rural Development Loan are great options for you. Those loan options are great for first time homebuyers as well.
It is important to note that a lot of lenders are requiring very high downpayments (as high as 30%) if you are purchasing a condo. If you are purchasing a condo, tell your lender up front that it is a condo.
The USDA Rural Development loan program is a loan program that has been recently created. You can only qualify for this loan if the property you are looking to buy is located in an area that is approved by the USDA Rural Development loan program. Usually the property will be located in a rural area such as in small towns or on the outskirts of cities. For instance, in Tallahassee, houses in Killearn Lakes would qualify for the loan. Almost all homes in Wakulla and Crawfordville would qualify as well. To check to see if a propery is eligible for this loan, visit http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
What I have talked about above are the basics that you need to understand if you are thinking about getting financing to purchase a home. You need to have a good source of income with your mortgage payment not exceeding about 30% or your income and total expenses not exceeding around 40%. If you have good credit, those percentages might be a little higher. If you want to find out if you can obtain financing, go speak with a lender. They can pre qualify you in just a few minutes and give you a realistic picture about your ability to buy a home. If you cannot buy a home at the present time, they will tell you what you need to do in order to qualify for a home loan.
Tune in next week to learn about the do's and don'ts if you are about to apply for a home loan.