It is anticipated that 2019 will experience a surge in home buying by first time homebuyers.
Many questions arise for these new home buyers, some of which are answered here:
How much house can I afford?
Assuming you otherwise qualify for a mortgage, the key determinant of the amount of home you can afford is your DTI ratio ( debt-to-income ratio). The maximum ratio is around 45%.
Calculate your DTI from the following: gross monthly debt payments plus the proposed mortgage PITI payment, divided by your gross monthly income. For example, if you want to calculate DTI for a $200,000 home purchase ( and a proposed 96.5% LTV=$193,000 mortgage), add other debt payments ( say, $1,000 per month) plus the PITI on the mortgage ( say, $1,508 per month) and divide by gross monthly income ( say, $5,500 per month). That would result in a DTI of 45%.
So, the maximum home you can afford is $200,000!
What is the lowest down payment that I can qualify for?
The lowest down payment is $0, available in the VA-guaranteed mortgage program ( Veterans only), and the USDA-guaranteed mortgage program ( for rural properties and lower lower family incomes.)
Gifts of down payments from family members or employers are also allowed for most mortgage programs. There are certain down payment grant programs offered by municipalities in the U.S.; however, there are minimum score requirements of 620, or more, for most of these programs, which limit the number of approvals.
The FHA-insured mortgage program allows a 3.5% down payment for home purchases, if the borrower’(s) credit score exceeds 580. It increases to 10% down if the score is between 550 and 579.
This is by far the most popular program for first time home buyers.
Conventional mortgage programs ( Fannie Mae or Freddy Mac) have 3% to 5% down payment programs ( with private mortgage insurance), but they carry minimum credit scores of 620.
What are closing costs, and how much are they?
Closing costs usually include services required to bring the mortgage to closing, and prepaid expenses for taxes and insurance. Here is a typical break out of such expenses
|Credit Report||$ 30 per borrower|
|Home Inspection||$ 250|
|Title Insurance Binder||$1,250|
|Closing Services||$ 500|
|Prepaid Taxes ( 6 mos)||$ 800|
|Prepaid Insurance ( 14 mos)||$1,610|
|Per diem Principal and Interest ( 5 days)||$ 200|
As many of these expenses are fixed, their percentage of the sales price varies. Usually, it represents between 3% and 5% of the purchase price.
However, as opposed to the down payment, closing costs can be paid by the seller, in whole or in part. You should negotiate this contribution ( “concession”) with the seller at time of entering the purchase contract.
How low can my credit score be?
The federal secondary markets ( FHA, VA, USDA, Fannie Mae and Freddy Mac) publish minimum credit scores. But individual mortgage companies that sell to these markets may impose higher credit score requirements. Here are the secondary market minimum credit score requirements:
Fannie, Freddy: 620
VA, USDA: 580
Be aware that lower credit scores may impose other requirements, like lower loan-to-value, increased mortgage rates or increased loan cost ( “points”).
Will Student Loan Debt hinder my chances?
All secondary markets require student debt to be accounted for, in one way or the other. FHA requires 1% of the student loan balances to be calculated as the monthly cost for such debt. This is so, even if the debt is in deferral and not being collected. For instance, $50,000 of student debt counts as $500 of monthly debt payments.
Freddy Mac counts one half a percent of the outstanding balance. But they have a 620 credit score minimum.
Fannie Mae and Freddy Mac will not count student debt at all in their home ready programs for first time home buyers. However, they have a cut off of 620 for credit scores.
So, in most cases, student debt will impact your purchasing power, but not in a major way. At 1% the monthly payment is similar to a car loan payment.
How much will a realtor cost me?
Real estate agents for borrowers ( “buyers’ agents”) do not charge you for their services. They are paid by the home seller, if the house sells. It is suggested that you retain a buyers’ agent at the beginning of your home search. They can help find you the home you can afford, and they can help you draft the home purchase contract when you find a home, including language for seller’s concessions.
( All Credits Mortgage Inc. specializes in finding financing for first time home buyers.)