Planning and Saving for Your New Home
Happy New Year!
If your goal for 2021 is to purchase a new home, I’m here to help. There are many different goal-setting systems you can use to organize and attain the goals you’ve set for yourself. I’m going to give you the overall things that need to be met to get you from thinking to owning.
During this time while you’re getting yourself ready for ownership, there are four major areas you want to ensure in an approvable state so that you can obtain a mortgage loan. They are:
Credit
Capital
Employment
Let’s dive into each item individually and talk about how the item impacts the FHA, VA, and Conventional loans.
Credit: Your credit matters and, as you’ve probably heard, the higher the better. Let’s see how your score impacts the mortgage loan.
FHA - the FHA minimum credit score is 580. Yes, a 580 credit score will get your foot in the door with an FHA loan. This score requires tighter debt to income ratios (buy my Home Buying Guide + Planner to learn more about debt to income ratios), but it is possible to finance your home with a 580 score using an FHA loan. When you get to a 620 score or higher, the debt to income ratios loosen a bit (again, buy the guide to learn more!). Always aim to get your credit score as high as you possibly can. The higher the score, the better the interest rates, and lower interest rates mean lower monthly payments, which save you money.
Conventional - The minimum credit score for a conventional loan is 620. The conventional loan is not backed by the federal government, it is a loan the lender offers so they want to ensure you have a stronger score. One benefit that comes from using a conventional loan when using a downpayment of 20% or more there will not be PMI insurance added to your loan which will save you money monthly.
VA - First, thank you for your service! The VA loan is accessible to the men and women who have served in the military. It offers a $0 downpayment, thereby saving veterans money and eliminating the down payment as a barrier to entry. Lenders look for a minimum score of 580 for a VA loan. Again, the higher the better.
Capital: Capital = cash (or other assets). You will need cash for your earnest money, down payment and to cover your closing costs or funds to close. I’m going to review down payment percentages for each loan below.
Earnest money is an indication to the seller that you are a serious buyer. Earnest money is generally around 1 - 3% of the price of the home.
As you search for and save for a home, be sure to budget about 1% of the price of the home to account for the closing costs you will incur.
Down payment funds cannot be borrowed meaning you cannot get a loan for your down payment.
You can submit alternative capital, i.e. jewelry, cars, etc., as long as it is included in the contract. For the most part, though most sellers accept cash as the down payment.
FHA: FHA requires 3.5% of the price of the home as the down payment. Let’s use an example of a home for sale that costs $100,000. For an FHA loan, your downpayment will be $3,500.
Conventional: To get the benefit of not having to pay PMI, conventional loans require a 20% down payment. Considering a home that costs $100,000, your down payment will be $20,000.
VA - For those who qualify, the VA loans require $0 down payment.
Employment - Let’s talk about your income. Lenders want to see a 2 year job history. If you have just accepted a new job, they want to see the offer letter.
If you are thinking about relocating to a new state, keep a few things in mind (these are all in general, be sure to check with a lender for your specific situation).
The lender wants to see that you have a job in your new state. You can satisfy this request for verification by providing an offer letter from a new job, or a letter from your current company explaining that you are being transferred or can work remotely.
The lender will verify that your income can support the debt you currently have along with the anticipated debt (mortgage) that you are applying for. To learn more about how to determine your debt to income ratio in my Home Buying Guide + Planner to get a worksheet to guide you through the process.
And there you have it! These are the things to keep in mind as you are planning and saving to purchase a home.