There are a lot of myths about buying a house: that you need at least a 20% down payment, perfect credit (or close to it), and a specific income level.
But the truth is, you don’t need a particular down payment amount, salary, or a credit score over 700 to become a homeowner. What you do need is insight into the process, preparation, and a game plan.
To help you move ahead with your home-owning dreams, read this guide. You’ll learn answers to these and other questions:
• What are the requirements to buy a house?
• How much of a down payment do you need to buy a house?
• What credit score do you need to buy a house?
• What documents are needed to buy a home?
8 Requirements to Buy a House
Here’s the scoop on the items you need to line up in order to buy a home. Consider this your checklist to achieving that dream; it can be an especially valuable first-time homebuyer guide:
Your credit score is one of the primary factors lenders will consider when reviewing your mortgage application. It helps a lender evaluate how well you have managed debt and made timely payments in the past.
Being aware of your current score might help you understand what loan programs you may be eligible for.
So what credit score is needed to buy a house, given the possible range of scores from 300 to 850?
• If you’re aiming for a conventional (nongovernment) loan, you’ll likely need a credit score of at least 620. However, most homebuyers have a score that’s higher than that, and if you have a brag-worthy credit score (say, 740 or above), you may qualify for better loan terms.
• But what if your score is not so lofty? For a government-backed loan (these include FHA, VA, and USDA loans), you may be able to qualify with a credit score in the 500s. For an FHA loan, 580 is the minimum score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 must put down 10%. Lenders may require a minimum score of 580 for a VA loan; and for a USDA loan, 640.
The government offers periodic free credit reports so consumers can review their credit history, but the reports do not give a credit score. However, seeing your credit report can allow you to recognize and remedy any errors or delinquent accounts.
You can monitor your credit score with a paid service as well. You may find these third-party services are available for free from some banks and credit card issuers, and use one at no cost with this money tracker.
2. Debt-to-Income (DTI) Ratio
Your debt-to-income ratio, or DTI, matters when determining the mortgage amount and the type of loan program you qualify for.
The DTI ratio equates to your monthly minimum debt payments divided by your gross monthly income. To find it, you would add up your monthly payments towards an existing mortgage (or rent) and related expenses (say, property taxes and insurance), plus any credit card debt and student, car, or other loans. Then you would divide that by your monthly salary, before taxes and other deductions are taken out.
Mortgage lenders usually like to see a DTI ratio of 36% or less for conventional loans. However, some will accept up to 45% and possibly even 50%. There is some flexibility out there, but it may require a bit of shopping around if you have a relatively high DTI.
3. Proof of Income
Even if you have a stellar credit score, for the majority of loan programs, you still have to prove your income to the lender to gain loan approval. This helps the lender verify that you have the means to pay the mortgage back.
For mortgage pre-approval, you’ll typically need to submit W-2s, your two most recent pay stubs, and your two most recent federal tax returns for the lender to verify your income. (Self-employed applicants will need to submit a year-to-date profit and loss statement and two years of records.)
If you are currently unemployed or have changed jobs recently, it’s wise to know that this may create a hurdle when seeking a mortgage. You might want to delay your home-buying plans until you have a more consistent employment record, or search for a lender that is less rigid in terms of this qualification.
4. Savings for a Down Payment and Closing Costs
As you think about how much house you can afford and consequently how much of a down payment you will need, you will likely want to run some numbers. You might start with a home affordability calculator to help you know your target range.
Now, about that down payment: Perhaps you’ve cobbled together a few thousand, but wonder about what is the average down payment on a house. Many people have heard you need at least 20% down, which can be an intimidatingly high number.
You can breathe a bit easier: Many homebuyers put 13% down — that’s $39,000 on a $300,000 home. Nothing to sneeze at.
The more you can put down, the more likely it is that you could get a lower interest rate. In most cases, you’ll need a 20% down payment to avoid private mortgage insurance or a mortgage insurance premium.
Here’s a glimpse of loan types and down payments of each:
• Conventional conforming loan. This is the most common type of home mortgage loan and typically has a minimum down payment requirement of 3%.
• FHA loan. This loan, among a few kinds of government home loans, requires as little as 3.5% down for those who qualify.
• VA loan. If you qualify for a VA loan, you can usually buy a home with no money down.
• USDA loan. This income-restricted loan, geared toward rural properties, requires no down payment.
If you are a first-time homebuyer, you can also look into down payment assistance programs. An online search for these programs from the Department of Housing and Urban Development (HUD), state and local housing authorities, nonprofits, and other organizations can help you reach your homeownership aspirations. They can offer grants and loans.
The other aspect of buying a house that may require cash: closing costs. These typically add up to between 3% and 6% of your loan. They include items like bank processing costs, title search, appraisal costs, and more. It’s worth noting that some lenders may offer credits toward closing costs; that can be something to keep in mind when you are searching for a lender.
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There are a couple more answers to “What do I need to buy a house?” When preparing to buy a home, you will likely need documents; a lot of documents, in fact. Assembling a file of what’s required can be an important step in getting organized. Here is some paperwork you may want to gather as you begin thinking about working with a mortgage lender:
• Recent tax returns and W-2 forms as well as proof of other income
• A letter from your employer verifying your employment
• For those who are self-employed, a business tax returns and P&L statements
• Recent bank account, brokerage account, and retirement account statements
• Student loan, car loan, and credit card statements, to show how much debt you have
• Titles to your assets, such as a current home or your car
• A gift letter, if appropriate (a statement that, say, a family member gave you funds toward your down payment)
• Photo ID
Yes, it can feel like a lot, but starting sooner rather than later and chipping away at the list can make it easier.
6. Pre-Approved Mortgage
Before you go home shopping, it can be wise to get a pre-approval letter from a lender or a few lenders. You submit some credentials that share financial information, and the lender says that you likely qualify for a loan of a certain amount.
While not a guarantee of mortgage approval, this will give you insight into what kind of loan you qualify for. It can also show homeowners that you are a serious shopper who is ready to buy.
Recommended: Mortgage Pre-Approval vs. Pre-Qualification
7. Mortgage Loan
When you find a property you love and work your way to an accepted offer and contract, you will probably be ready to apply for your mortgage. You will likely have to make decisions about the term of the mortgage (30 years is common, but shorter terms with higher monthly payments are possible, too), the rate (both the percent you’ll pay and whether you go with a fixed or adjustable rate), and other details.
When you submit your application, you will provide documentation of your financial qualifications. You will likely work your way through questions as your file goes through underwriting and you move toward your final approval and closing date.
8. Real Estate Agent (Probably)
The vast majority of buyers use the services of a real estate agent or broker, according to the National Association of Realtors® (NAR). In 2022, 86% of homebuyers worked with one.
You can go it alone, but finding a real estate agent who is experienced and knowledgeable can be key to, well, getting you a new set of house keys.
Agents have access to the multiple listing service, which is a comprehensive list of homes for sale by a real estate agent or broker in your desired location.
A buyer’s agent can help you:
• Build your wishlist and hunt for homes that fit your needs
• Check out listings in person
• Write offers and counteroffers, including putting an offer on a contingent house
• Negotiate with the seller
• Navigate the complexities of the purchase contract.
Using a real estate agent might also relieve some of the stress that comes with purchasing a home, especially when buying in a hot house market.
What do you need to buy a house or condo? First, you’ll want to be on pretty solid financial footing, typically with a good credit score, income history, and DTI, as well as some money saved toward a down payment and closing costs. You may also want to have a good agent and the right documentation in your corner.
If, like many buyers, you are hunting for a mortgage, check out what SoFi Mortgage Loans can offer you. You’ll find competitive rates and access to a host of SoFi perks. Plus, first-time homebuyers who qualify can put as little as 3% down.
What are the basic needs to buy a house?
To buy a house, you will likely need documentation of your finances, a reasonable credit score and debt-to-income ratio, a mortgage pre-approval, and probably funds for a down payment and closing costs, as well as a real estate agent to help you manage the process.
How much money should you have before buying a house?
Lenders will likely want to see that you are financially stable and can afford the costs associated with owning a home. In terms of a down payment, the typical amount is 13% percent of the home’s price, but there are ways to buy a home with less or perhaps with no money down. A down payment of 20% or more will allow you to avoid paying for private mortgage insurance (PMI).
What credit score is good to buy a house?
The credit score needed to buy a house will vary, with 620 being the usual minimum for a conventional loan, though most buyers have a score of 650 or higher. Those with scores of 740 or higher will usually get the best loan terms. There are also programs to help those people with credit scores in the 500s become homeowners.
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