You don’t have to have excellent credit or a 20% down payment to buy a house or condo. You do need a plan, which starts with knowing how much you can afford.
If you think you have your financial house in order, for the most part, here are some suggestions to get you to the closing table.
A Home-Buying Checklist
You might want to start with a home affordability calculator, and then let’s launch into six things you’ll need to buy a house.
1. A Real Estate Agent (Maybe)
The vast majority of buyers use the services of a real estate agent or broker, according to the National Association of Realtors® (NAR).
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.
2. A Down Payment (Probably)
You’ve cobbled together a few thousand, but what is the average down payment on a house? It’s less than the benchmark of 20%.
Many homebuyers put 6% down—that’s $18,000 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, the most common type of mortgage loan, 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.
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3. Closing Costs
Closing costs cover a variety of expenses and are in addition to your down payment.
Typical home-buying closing costs on your side of the ledger will add up to 2% to 5% of the loan amount.
Generally the seller pays the real estate commission for both the seller’s and buyer’s agents. The seller, especially in a buyer’s market, may be willing to pay for some or all of the buyer’s eligible closing costs. The lender may also give a credit toward closing costs.
US closing costs averaged $6,000, including taxes, and $3,500, excluding taxes, in 2020, according to ClosingCorp, a closing costs technology company. If your loan requires property taxes to be paid at closing, and you’re buying in a high-tax state, sticker shock may ensue. In Washington, D.C., for example, buyers paid about $29,330 in closing costs, with taxes, in 2020.
4. A Certain Credit Score
Your credit score is one of the primary factors lenders will consider when reviewing your mortgage application, so being aware of your current score might help you understand what loan programs you may be eligible for and, in some cases, your home affordability.
So what credit score is needed to buy a house? In the range from 300 to 850, If you’re aiming for a conventional (nongovernment) loan, you’ll likely need a credit score of at least 620.
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 typically require a minimum score of 580 to 660 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.
You can monitor your credit score with a paid service, for free from some banks and credit card issuers, and at no cost with this money tracker.
5. 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 is the lender’s way of verifying that you have the means to pay the mortgage back.
For mortgage preapproval, 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.)
6. A Reasonable Debt-to-Income Ratio
Your debt-to-income ratio matters when determining your mortgage amount and may factor into the type of loan program you qualify for.
The DTI ratio equates to your monthly debt payments divided by your gross monthly income.
Mortgage lenders usually like to see a DTI ratio of 36% or less.
Historically, mortgage lenders would typically look at a back-end ratio and a front-end ratio. A front-end ratio shows how much gross monthly income would go toward the mortgage payment, property taxes, homeowners insurance, and any HOA dues.
A back-end ratio, which is primarily used today, shows how much of your income would be needed to cover all monthly debts (like student loan, car loan, and credit card payments), plus the monthly mortgage payment and housing extras.
Buying a House, or Maybe a Condo
Condominiums are often a more affordable way to enter the homeowner leagues than single-family homes are.
Condo and co-op sales spiked 29% within a year, according to NAR, probably thanks to the dearth of affordable housing and amped-up demand.
If you decide to buy an apartment, you’ll want to understand the differences between condos and co-ops. The price per square foot for a co-op is usually lower than for a condo, but financing might be more challenging than for a condo or single-family home.
You can use most types of mortgages to buy a condo, including conventional 30-year fixed-rate mortgages and government-backed loans.
What do you need to buy a house or condo? First, you’ll want to be on pretty solid financial footing. Then a good agent, probably a down payment, and proof of income will come into play.
If you’re not a cash buyer, you’ll need a mortgage. SoFi offers fixed-rate home loans with as little as 5% down.
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