With so much instability in life these days and so much beyond our control, many people are turning to homeownership for a sense of security, and with good reason. But, how to start the home-buying process can seem overwhelming when you start looking through properties that don’t match your preferences, needs, or worse- your budget. There’s no denying that home prices are a hot topic right now, and those numbers can be a shock if you don’t know your own buying power or what needs you are looking to fill in the first place. The JudyMac Team is here to help you move from the unpredictability of renting to looking for your new home with confidence.
How to Start the Home-buying Process
Now that you have decided that buying a house is the best choice for your future, what comes next? For most people, buying a home takes some planning well in advance. You need to be sure your credit score is appropriate for getting the best rates and have substantial savings built up for your down payment and the many other costs of purchasing a home. The decisions to be made seem to pile up quickly. Many people find the preparation necessary to start the home-buying process can take months or even years, depending on your personal circumstances.
Getting Mortgage Ready
Most homes are bought using a mortgage of some kind, each of which will have slightly different requirements for approval. When determining a buyer’s ability to repay the mortgage, these lenders will typically consider a few key factors for the decision process.
Credit Score
It’s unlikely that you have made it to adulthood without hearing about the importance of your credit score. Love it or hate it, you have to have decent credit to get a mortgage, but you’re likely to get better interest rates if you have better credit. While you will typically need a credit score of at least 620 to qualify for a conforming mortgage, a mortgage through the FHA can require a credit score as low as 580 or lower with a higher down payment.
Just remember that simply meeting the minimum credit score requirement doesn’t mean you are ready to apply for a loan. Raising your credit score even a little can significantly affect your interest rates, saving you more money in the long run. The best way to improve your credit score is to keep your credit utilization low and make on-time payments.
Down Payment, Savings, and Other Assets
You will still need quite a bit of cash to complete the transaction when planning to utilize a mortgage to purchase your home. The average down payment for a standard mortgage is around 3% of the house’s purchase price, but some lenders may require more depending on varying factors. When you consider the average cost of buying a home in Memphis, Germantown, or Collierville of $500,000- that’s a whopping $25,000 just in your down payment.
Adding in the additional average of 3-6% for closing costs, you may realize you need to save a little extra money before you rush to put in an offer. While closing costs can vary and are even sometimes covered by the seller, the fees, taxes, and insurance costs they cover are essential to the home-buying process and can’t be avoided.
Some mortgages and lenders may also require you to have a certain amount of ‘reserves’ or savings set aside to cover your mortgage if you lose your income. And it is also a good idea to have a little bit of savings dedicated for pop-up costs associated with buying your new home, like moving expenses and minor repairs or upgrades.
Work History and Debt-to-Income Ratio
One significant factor in determining your financial stability is your work history. Maintaining a reliable income helps show you can handle the weight of your monthly mortgage payments. But compared to your income, the amount of debt you currently are paying is a vital component.
To figure out your debt-to-income ratio, add up all of your monthly debt payments and divide that number by your gross monthly income. Move the decimal point two places to the right; that number is your DTI percentage. Typically, it would be best to have a debt-to-income ratio of around 43%, but a lower DTI can help you qualify for a larger mortgage or get a lower interest rate. Paying down your debt, specifically the ones with the highest interest rates will help lower your overall DTI.
Determine Your Needs and Budget
Just because you can get approved for a sizable mortgage doesn’t mean you need or want all that comes with it. Before setting your budget, you should consider your home needs. Will you be looking for a home with more space, a large yard, or amenities like a Homeowners Association? You don’t want to pay for something you won’t need, but you don’t have to sacrifice the parts that will make it feel like home for you and your family.
And just as important as the house itself is the location of the house. Determining what area you want to purchase a home will help you set a more appropriate budget and stick to it when you get out there and see what all the market has to offer. You may notice that your options change quite a bit depending on the neighborhood or part of town you are in. While location can limit your options, taking your time and sticking to your preferred budget will help.
Understand the Different Types of Mortgages
The location, the type of home, and whether you have purchased a home in the past can affect the type of mortgage you should utilize. The type of mortgage best for you will depend on your credit score, DTI, and down payment. Understanding your mortgage options ahead of time can help you better prepare for pre-approval later.
Types of Mortgages
FHA Loan
This is a common mortgage backed by the Federal Housing Administration and tends to be best for first-time and lower-income homebuyers who typically have lower credit scores or less money for their down payment.
USDA Loan
This type of mortgage requires a 0% down payment and is backed by the US Department of Agriculture. This mortgage only applies to rural or suburban areas and is only available to lower-income borrowers.
VA Loan
This type of mortgage is only available to current and former members of the military who meet minimum service requirements or if you are a qualifying surviving spouse. Backed by the Department of Veterans Affairs, this mortgage also allows 0% down payments.
Conforming Loan
Often considered a “standard” or “conventional” mortgage, this option meets the requirements for purchasing by Freddie Mac or Fannie Mae.
Jumbo Loan
This type of mortgage exceeds the borrowing limit for conforming mortgages set by the Federal Housing Finance Agency. To qualify, you will need a good credit score and a large down payment.
When you’re ready, so is The JudyMac Team!
While you’re doing your research and prep, be sure to check out our Resources for Buyers and our pre-qualification and mortgage loan calculators to get you started on your path to buying your home! Judy McLellen and The JudyMac Team of Crye-Leike Realtors is here to help you from the beginning to the end and all the ins and outs. Give us a call when you’re ready to start your home-buying process!
