Are you thinking of buying a house but are completely lost on where to start? Buying your first house is probably the most expensive and the most stressful purchase that you are going to make.
But don’t fear! I am here to walk you through the three major steps you need to take to get ready to buy a house. This is even before walking into that first open house or calling a realtor! Getting ahead of the three items below will make you an organized first-time homebuyer. This will make lenders and realtors take you much more seriously. But more importantly, getting the three things below organized will make you a less stressed first-time homebuyer.
Meet Minimum Credit Score when Buying a House
Do you even have the credit score that you need to buy this dream house? This is the very first thing you should tackle to get ready to buy a house. This is because it can take the most time to handle. You see, there are minimum credit scores that you need to meet to buy a house. The minimum required credit score depends on the type of loan that you are applying for.
For example, if you are trying to get an FHA loan, the minimum credit score for that is 580. If you’re trying to get a conventional loan, the minimum score for a conventional loan is 620.
Why your Credit Score Matters
Your score is also important when buying a house because the higher your credit score, the lower your interest rate will be. This in turn impacts how much of a loan you can get. Generally, the higher your credit score, the less stressed you’re going to be. That’s because you’re going to have a much easier time getting a yes on that loan pre-approval!
It is important to note that mortgage lenders use a specific type of credit score to qualify borrowers for a mortgage. The free credit score from your bank or from Credit Karma, is not what lenders use in mortgage applications.
Where to find your credit score
You want to make sure that you are specifically looking at a mortgage FICO score. There is only one place that you can look up your mortgage FICO score on your own. That place is at myfico.com. You want to look up your score yourself before you even call a lender. This way, you avoid an unnecessary hard credit inquiry if your credit score is too low.
For the most amount of options, you want to make sure that you have a credit score of around 640. But the minimum that you can get a loan with is 580.
There are a handful of lenders that will an FHA loan with a credit score of 500, but these are very difficult to come across.
When to check your score
Around a year before you want to buy a house is a great timeline to look at your credit score. That way if your credit score isn’t as high as you would like it to be, you have a little bit of leeway to fix your score.
You really don’t want to look up your score two months before your lease is ending! If you happen to have a not-so-great credit score, there is little to no chance you can get that score fixed in two months’ time. Which makes completing a home buying transaction near impossible.
Have Enough Closing Cost Funds for Buying a House
In addition to having a good credit score, closing costs are important to get ready to buy a house. Similar to the credit score, this can take a long period of time to get in order. So it is important to start saving for closing costs early.
House Downpayment
You probably have heard about the down payment money that is needed to buy a house. Well, that downpayment is not the only money you will need to bring to the closing table.
When you hear that you only need 3.5% down to buy a house or 5% down, it’s partially true. It is true that there are these low down-payment options for you when you are buying a house. But you also need to consider all closing costs in addition o the downpayment.
What are Home Buying Closing Costs?
A lender is going to confirm that you have the deposit money for purchasing this house. But also all the closing cost money that you are going to need to complete this loan transaction. A lender will not give you a pre-approval for that loan if you don’t have the full amount needed.
Some of what is in these closing costs include the appraisal for the house and origination fees charged by the lender. Prepaid interest on the loan and prepaid insurance are also examples of closing costs. These are some of the closing costs needed in addition to that 3.5% low down-payment.
Estimating Closing Costs for Buying a House
As you get ready to buy a house, you are not going to know exactly how much you’re going to need until you actually apply for the mortgage loan. But a good ballpark number to have is about 10% of the loan amount that you are going to get. So, if you’re going to buy a house for $100,000, you would want to save up at least 10% of that. So about $10,000, would generally be enough to cover both the down payment and closing costs.
Of course, the more funds that are available, the easier it is for you to qualify. This is because you would have more loan options. So if you are able to save up more than that 10%, that will put you in an even better position to get approved for a mortgage loan.
Gather Loan Application Documents for Buying a House
The third thing that you want to have in order is you want to have all your documents ready for when you apply for this mortgage. If you want to borrow hundreds of thousands of dollars from a bank, they want to make sure that you can actually pay that money back. To protect their interests, there are several documents that you need to submit for review. This review will determine if you can get a pre-approval for the loan.
A lot of realtors will not show borrowers houses unless they are serious buyers that can actually get this loan. That preapproval letter is what determines your “seriousness” as a homebuyer. Remember, realtors, work on commission. So they cannot afford to waste time showing homes to borrowers that are unable to buy the house.
Some of the documents that will be reviewed include two years’ worth of filed federal taxes including W-2s. If you lost your W2s and or tax return you can get a copy from the IRS. You will not be able to get a pre-approval without both. There are a few other documents you will need including ID and bank statements. To keep you organized I put together a free checklist of all the documents you will need.
Summary
You are on your way to a less stressful experience once you have your credit, documents, and money in order.
Don’t forget to grab the free checklist to keep track of your progress. And check out the video below on how to look up your mortgage fico credit score.
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