Home > Mortgages > How to Get Your Finances in Order Before You Buy a Home

Comments 0 Comments

To successfully buy a home these days, you’ll need patience, resilience to rejection and sound financial planning.

You don’t need to earn gobs of money to successfully purchase a home — well, depending on your area. You do, however, need to have enough income left over after your proposed mortgage payment and other financial obligations. You need to be able to show consistent income coming in, and enough of it, that your mortgage payment and other liabilities are manageable in relationship to your monthly income (before taxes).

Here’s what you need to get in order when you want to buy a home.

Your Other Debts

Generally, lenders first look to see what other debts you currently have — including car loans, student loans, credit card payments, etc. A lender wants to see that your debts plus a new mortgage payment will consume 45% or less of your income. Put simply, if your pretax income were $9,000 per month, the lender would want to see $4,050 or less per month going toward your debts and new mortgage payment. Of course, a lower payment-to-income ratio is ideal for long-term affordability. You can see how much house you can afford using this calculator.

Your Credit Score

The minimum credit score to get a mortgage these days is 600 – specifically for an FHA loan. A higher score results in more, and better, loan offerings. The credit score does dictate what loan program you can apply for, which ultimately might sway a seller in determining which offer they go with. Remember how you look on paper, not only to the mortgage company, but also to the seller and the real estate agents. This is a big factor many homebuyers overlook.

Here’s an example: Let’s say your credit score is in the 620 range, and you’re going with an FHA loan. In the real estate agent community, FHA loans still carry a stigma that they are harder to obtain and that the FHA is picky on property type, which ultimately means a more problematic escrow. Real estate agents influence all the parties, including the buyer and seller alike. In other words, if you have an FHA pre-approval and you’re buying a home, there is a possibility the seller might choose to pass on your offer in favor of other similar-priced offers that will be financed with conventional loans, which are considered the cream of the crop. It’s important to have your loan professional consult with both real estate agents, always.

If you have time to work on building your credit in advance of applying for a mortgage, that can also be helpful. You can pull your free annual credit reports to look for any errors you need to dispute or issues you need to work on, and you can check your credit scores for free on Credit.com to see where you stand.

Your Down Payment

If you meet the income limitations, you may be able to obtain a 3% down payment conventional loan. Otherwise, you can apply for an FHA loan to acquire a home with as little as 3.5% down up to the maximum conforming loan limit in the county in which you are buying – which is $417,000 in most U.S. counties, though higher in some. For example, in Sonoma County, Calif., the maximum FHA loan limit is $520,950, and the FHA will allow you to take out a mortgage with a low 3.5% down payment, despite the size of the mortgage.

Alternatively, if you’re looking to borrow more than the conforming loan limit, you would need at least 10% down for a conventional mortgage.

If your desired loan is $417,000 or lower, all you would need for conventional loans 5% down. The 3% down program that just became available through Fannie Mae and Freddie Mac contains more stringent guidelines, reducing your borrowing power — which unfortunately does not maximize your purchase potential in a competitive market.

Are you working with a down payment assistance program? While you might be qualified with the down payment assistance program, you may have a difficult time getting into contract, especially against competing offers on the same property that have more skin in the game.

Your Closing Costs

Expect to pay at least 2.5% of the purchase price in closing costs as additional cash beyond your down payment to acquire a home. Gone are the days of requesting seller credits for closing costs and still having a chance at getting your offer accepted. This does vary between markets, but it is harder to come by as the economy recovers.

Today’s market shows a growing demand for housing coupled with shorter supply, which means competition. A seller credit for closing costs pre-approval is less likely and here’s why…. You are making a purchase offer to buy a home for $400,000, and requesting a $10,000 seller credit for closing costs – which results in the direct loss of net monies to seller. This means your offer is really $390,000. You might end up getting a seller credit based on an inspection of the property, or as a result of new information during the process, but that would happen later in the escrow process with your real estate agent’s guidance.

To buy a home, you will need access to cash as well as having your financial house in order. Looking as strong as you can on paper does help increase your odds of getting into contract on a home. One additional way to spruce up your offer is to put more cash down, lowering your mortgage loan amount, and subsequently lowering your mortgage payment, which can make it much more manageable in the long run.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team