If you are a first time home buyer you're probably wondering how do you get qualified to buy a home?
For this artice, we're going to focus strictly on getting prequalified to buy a home. Will do another article later that outlines more steps in the homebuying process.
OK, so really the first step that I would recommend is to find a good real estate agent to work with. If you're a first time home buyer you're going to want to find a buyers agent. Somebody you're comfortable with, somebody who seems knowledgeable, somebody who seems experienced and somebody who can genuinely guide you through the process and more importantly direct you to a local lender that they would recommend.
When you're getting prequalified and trying to buy a home it's very important that your lender and your real estate agent are in sync, as they will need to work together to help you through the process. The right agent will have good relationships established with local lenders and based on your situation should be able to connect you with the best lender to help you specifically.
What kind of credit should you have?
So let's get to it how do you actually qualify? Your credit score is very important. You may see a lot of headlines and articles that say you don't need a score or that you can get qualified with a low score, but to be perfectly honest it's simply not true. In the real world, if you're talking to a bank and you're trying to get prequalified for a mortgage to buy a home, you are generally going to want to have a minimum credit (FICO) score of 620.
Now before I talk a little bit more about that number let me explain credit scores a little bit. A lot of websites are going to give you what's called a vantage score, that is a consumer credit score and it's not your actual credit score the banks use. The score that banks will use is called a FICO score. If you already have a credit card most times when you log into your account you'll be able to see that score.
Regardless, any time you can see your credit score that's a good thing because it's going to be an indicator. At the end of the day it's almost impossible to see the exact same score that banks will see. Because there are just so many different scoring models and so many different factors. But again if you can see your credit score it's gonna be an indicator and it's gonna give you a good idea of where you stand.
As a first time home buyer 620 FICO Is usually going to be the bare minimum and with that you should be able to qualify for an FHA home loan. But here's a tip, your credit score, it's almost like a video game with different levels. 620 will give you certain options, 640 will give you certain options, 660 will give you more options, 680 or higher will really open doors to many programs. The bottom line is the battery score, the better options the bank is going to offer you, the better interest rate they're going to offer you, and the more opportunities you're going to have to buy the home that you want
What do banks look for?
So, besides your credit score what else do banks look for when they pre-qualify you for a mortgage to buy a home? They're going to look at your debt to income ratio and they're going to look at how much money you have saved to buy a home.
Let's take these one at a time. So what is your debt to income ratio? The bank will look at your total gross monthly income from all sources, when they pull your credit a list of all your debts will come up, any credit cards that you have any loans that you have, each one of these accounts will have a minimum payment. The bank uses an automated underwriting system to subtract all of your debts and obligations from your gross monthly income. That is how they determine your debt to income ratio. In most cases your total monthly debt should not exceed 40 to 50% of your total monthly incomein most cases your total monthly debt should not exceed 40 to 50% of your total monthly income.
Now the other thing the bank will look at is how much money do you have saved up? This is important because no matter what your situation, the bank will look at is how much money do you have saved up. This is important because no matter what program you may qualify for you're always going to need to have money to buy a home.
How much money will you need to buy at home?
The easy answer for that is going to be about 10% of the purchase price. with FHA home loans and low down payment home loans, you're typically going to need between 3 to 5%, but what most people don't realize is that you also have a closing cost when you buy a home and they generally run around 6% of the purchase price. The down payment and the closing cost can vary. So an easy estimate to be safe is to say that you will need 10% of the purchase price to buy a home. So if you want to buy a home for $200,000, it's best that you have a minimum of $20,000 cash on hand.
Another thing that banks will look at when you were trying to be qualified for a mortgage is your job history and stability. They are going to want to see a consistent two year work history. They don't want to see any large gaps in your employment and they don't want to see that you switched jobs frequently. They want to see stability and consistency. Same thing with your residence, your address, they want to see a consistent two-year history for your home address.
if a bank is going to lend you hundreds of thousands of dollars to buy a home, and count on you to make the monthly payments, they are going to want to see that you are a consistent, reliable person, with a good job history, a stable home address, enough funds to buy the home, and sometimes they like to see you have some extra money in the bank those are called cash reserves.
I know it may sound like a lot but it's generally not that difficult to apply and qualify for a mortgage. As I stated at the beginning of this article, in my opinion this journey starts with finding the right real estate agent, to represent you, and guide you through this process.
if you're looking to buy a home anywhere in the greater Lehigh Valley, Allentown Bethlehem region, please feel free to reach out to myself or my team here at Lehigh Valley Just Listed, and we will definitely be happy to guide you through the prequalification process, connect you with a local lender, and advise you with all things involved in buying your first home.
Best of luck in your home search