Buying a home is one of life’s most exciting experiences. However, financing a home purchase is solely fact-based, with lenders basing their decision on documentation. So, here are six basic requirements to finance your home purchase.
Many people who want to buy a home believe they need a high credit score. However, depending on the mortgage program, homebuyers can get approved with a credit score as low as 580.
Different mortgage programs require specific minimum credit scores.
- Conventional home loan: Minimum credit score of 620 is required.
- FHA home loan: Minimum score of 580 is required; however, with a downpayment of 10%, some mortgage lenders may accept a credit score as low as 500.
- USDA home loan: Minimum credit score of 640.
- VA home loan: The Department of Veteran Affairs doesn’t have a minimum credit score, but most lenders expect 620 or above.
Even if a prospective homebuyer qualifies for a mortgage with a low credit score, it does not mean that a lender will approve them for a mortgage.
Lenders consider many other factors, such as recent credit reports. When qualifying for a mortgage with a low credit score, it is crucial not to have any defaulted loans or late payments within the last 12 months.
Loan programs like the FHA, VA, and USDA take into account non-traditional forms of credit on an application. Rent, utilities, insurance, cell phone payments, and so forth can be enough to establish a credit history.
Income and Employment
While credit scores are essential, steady income and proof of employment are also requirements needed for a mortgage loan. Lenders want to confirm that there is a consistent and adequate income to afford a monthly mortgage payment.
For self-employed homebuyers, lenders require two years of business and personal tax returns. With income fluctuating for self-employed workers, lenders often average out income based on a two-year time frame to determine the best mortgage loan.
Some mortgage programs also specify income limits. For example, USDA loan applicants must have at or below 115% of the median household income for the area.
One expense many homebuyers should expect upfront is a down payment. Mortgage loans have different requirements for down payments, so the amount a homebuyer will have to pay upfront will vary.
While conventional loans might require between 3 to 5% of the sales price as a downpayment, a Federal Housing Administration (FHA) loan requires 3.5% or above. Furthermore, some homebuyers can qualify for a USDA or VA home loan with a 0% down payment.
Another expense homebuyers should expect upfront is closing costs. However, occasionally, the seller will cover some of the closing costs, or lenders will provide credit to cover these expenses. When lenders offer credit to cover closing costs, it usually results in a higher mortgage rate.
Typically, closing costs are around 2 to 5% of the loan. Therefore, with a down payment of 3%, homebuyers should calculate expenses of about 5 to 8% of a total loan.
Lenders will also take into consideration a homebuyer’s existing debts. Debts, such as student loans or credit card debt, can negatively affect a homeowner’s ability to become eligible for a home loan.
Lenders will calculate the homebuyer’s debt-to-income ratio (DTI), determining the gross monthly income that goes towards debt payments.
Debt-to-income ratios vary for different programs:
- Conventional Loan: 36-43%.
- FHA Loan: 43%.
- USDA Loan: 41%.
- VA Loan: 41%.
However, some lenders allow a higher ratio to individuals with an excellent credit score, cash reserves, or a larger down payment.
Alongside authorization for a lender to check a credit score, several documents are often required to apply for a mortgage. These can include:
- Two years of pay stubs, tax returns, and W-2s.
- Employment verification letter.
- Bank statements and information about assets.
- Rental history.
- Photo ID.
If you are self-employed or a contractor, a year-to-date profit and loss statement may also be required.
Knowing the basic requirements for purchasing a home can help homeowners determine whether they qualify for a mortgage. However, it is up to mortgage lenders as to whether you are approved for a mortgage.
Many homeowners meet with a mortgage lender to get pre-approved, which helps homebuyers know what they can afford when looking for a home to buy. Getting pre-approved and having a pre-approval letter shows sellers that the homebuyer is serious about their offer.
Marimark Realty is a full-service real estate company in Tampa, Florida. Our focus is on providing a personalized experience for both buyers and sellers of residential and commercial properties, as well as investors.
To begin the journey of purchasing or selling your home, or purchasing commercial or investment properties, contact us at your earliest convenience.