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5 Things to Know Before Buying a Home

You don’t need to be a Real Estate Mogul to purchase a home. However, you do need some key information about yourself, Mortgage Loans, and the housing market before starting the home buying process.

Consult a Local Real Estate Agent

Consult a local real estate agent to learn about home prices, demand, and inventory in your market. Conducting a home search by yourself can be a full-time job. Though the Internet makes it easy to find homes in your price range, a good agent usually has access to “off-market” properties through other agents and colleagues.

Additionally, a seasoned agent knows what constitutes a good deal in your area. They know how to formulate tempting offers, when to play hardball, and when to walk away. This expertise is especially helpful in markets where inventory is low and sellers have “the upper hand” – also known as a seller’s markets. So, unless you are an expert in the real estate market and a master negotiator, we HIGHLY recommend using a local real estate agent.

Your Credit Score

Understand that a good credit score shows your lender how likely you are to repay your loan. Essentially, the higher your credit score, the lower your interest rate will be because you have proven that you pay your bills. Learning your credit score will give you an idea of where you’ll stand with lenders.

The type of loan you are trying to obtain also depends on your credit score. Score requirements differ from ones insured by the Federal Housing Authority; known as FHA loans, ones insured by the U.S Department of Veteran Affairs; a VA Loan, or a Conventional loan from a private lender. Down below the chart illustrates the minimum credit score needed for each loan.

Loan Type                  Minimum FICO® Score
Conventional             620
FHA loan                    580
VA loan                       580

How Much $$ You Should or Shouldn’t Spend

You’ll also want to analyze your debt-to-income ratio, DTI, when determining how much you can afford to spend. Your DTI is the portion of your monthly income that goes toward monthly debt commitments. This includes housing costs, car payments, student loans, credit card debt, and other debt obligations. A good DTI when qualifying for a mortgage is usually 36% or below. Lower is recommended because that leaves room for emergency funds.

It’s also a good idea to keep housing expenses to no more than 28% of your monthly gross income. This includes monthly payments for your mortgage, property taxes, and homeowners insurance.

Understanding Down Payments

The down payment is cash, paid at closing, towards the home purchase and is a percentage of the purchase price. Lenders offer a variety of mortgages with different down payment requirements. Explore your options and decide how much you’ll need to save for a down payment. The chart below explains the minimum requirements for each loan type.

Loan type                          Minimum down payment
Conventional loan          20% depending on lender and loan
FHA loan                           3.5%
VA loan                              None required

Although FHA and VA loans require little or no down payment, they may also require other types of fees. For example, a VA loan funding fee or private mortgage insurance in order to mitigate risk.

Get Prequalified for A Loan

Before you start looking at homes, apply for mortgage pre-approval. This will give you realistic expectations on how much you can spend on a house. That way you aren’t shopping for houses that are more expensive than the amount your lender is willing to lend you. In this market, it is important to act quickly once you find a home you want to make an offer on. If you are prequalified for a loan you will be able to submit an offer quickly and with confidence once you find the perfect home.

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