What Do You Need to Buy a House


what I need to buy a house

The homebuying process can be complicated. But it doesn’t have to be.

This article explains what you need to buy a house, from the credit score requirements to the down payment, and tips to make buying your dream home a piece of cake.

1. Have a Decent Credit Score

You will need at least a 620 credit score to be eligible for most types of mortgage loan programs. However, borrowers with a 500 credit score or higher may qualify for an FHA loan.

You could still be denied a mortgage if you meet the minimum credit score requirements if your credit history has other negative account information. Late payments, collection accounts, ad other types of negative items on your credit could affect your ability to qualify.

2. Enough Saved for the Down Payment and Other Costs

There are other upfront costs associated with buying a house than just the down payment. You should have enough money saved to cover closing costs, the home inspection and appraisal, and upfront mortgage insurance. 

Closing costs are fees charged by lenders for issuing and funding the loan, and on average, are between 2% to 5% of the loan amount. Government home loans such as FHA have upfront mortgage insurance premiums (UFMIP) of 1.75%.

The down payment will need to come from your own funds in a bank account, IRA, 401k, or another investment account. You cannot get a loan for the down payment. In some cases, you can use gift funds for the down payment.

3. Two Years of Provable Income

Solid employment history, a steady paycheck, and solid income are needed to qualify for a home loan. Most lenders will require that you have been with the same employer, or in the same industry for at least two years.

Being a regular W2 employee receiving a salary or hourly pay makes it easier to qualify. Commission employees will have their last two years of tax returns averaged to come up with their average annual income.

4. Debt-to-Income Ratio under 50%

Lenders use your debt-to-income ratio (DTI ratio) to determine the maximum loan amount. Conventional home loans will require a back-end ratio of 43% or lower. Government home loans have more leinent requirements allowing for a DTI ratio of up to 50% in some cases.

Calculate your DTI ratio by taking your total monthly debt payments such as your mortgage payment, credit card payments, personal and student loans, etc., and divide it by your gross monthly income.

5. Determine How Much You Can Afford

There are several costs associated with homeownership besides just the principal and interest payment. Mortgage insurance premiums, hazard insurance, property taxes, HOA dues, the home appraisal, and more.

Use our home affordability calculator to see how much you can afford.

  • Mortgage Insurance – Private mortgage insurance (PMI) is required on all home loans (except VA loans) with a loan-to-value ratio above 80%. FHA loans require a mortgage insurance premium (MIP) regardless of the down payment amount. Mortgage insurance ranges from 0.50% – 1.00% of the loan amount, depending on which type of loan you have.
  • Homeowners InsuranceHomeowners insurance is not optional; if you have a mortgage, you’re required to have it. The average cost of homeowners insurance is around $1,000 annually.
  • Property Taxes – The most expensive extra cost associated with having a mortgage is the property taxes. Property tax rates vary widely by state and county. Your lender will set up an escrow account where a portion of your monthly payment will go to pay for your homeowners’ insurance and property taxes.
  • Home Appraisal and Inspection  – The home appraisal is an additional cost paid by the buyer before closing. On average, a home appraisal costs between $400-$600. A home inspection is not required but is highly recommended, even if you’re buying a new home. You can get your new home inspected for $300–$500, depending on the home’s square footage.

 

6. Know the Available Loan Programs

You should familiarize yourself with the different types of mortgage programs available and which one is best for you.

Requirements by Mortgage Type

FHA Loans

FHA loans are guaranteed by the Federal Housing Administration, allowing lenders to lower their credit requirements. Borrowers with a 580 credit score can qualify with just a 3.5% down payment. They are also a great option for low-to-median income buyers because up to a 50% debt-to-income ratio can be accepted.

VA Loans

Veterans of the military are eligible for a VA loan guaranteed by the Department of Veterans Affairs and issued by private lenders. They provide 100% financing so borrowers can get a home loan with no money down. They also don’t require mortgage insurance, saving borrowers thousands of dollars per year.

USDA Loans

USDA loans are guaranteed by the U.S. Department of Agriculture and provide 100% financing for low-to-median income buyers in rural areas of the country. To be eligible, you must have a 640 credit score, have an income that does not exceed 115% of the area median income (AMI), and buy a home in a USDA-eligible location.

FHA 203k Loans

203k Loans are a type of FHA loan that provides financing to purchase a home but additional funds to make home improvements. A 620 credit is needed with a 3.5% down payment.

Conventional Loans

Conventional loans are not guaranteed by the government but by private mortgage insurance companies. They have stricter borrower requirements but fewer restrictions on the types of properties you can buy. To be eligible, you need a 620 credit score and a 5% down payment.

Home Possible and HomeReady Loans

Fannie Mae and Freddie Mac created the Home Possible and HomeReady loan programs to provide low down payment options for low-income first-time homebuyers. With a minimum 620 credit score, you will need just a 3% down payment. They do have income limits. Your household income cannot exceed 100% of the area median income (AMI).

Loan Terms

There are two types of mortgage terms a fixed-rate mortgage, which means you will have the same interest rate for the life of the loan. An adjustable-rate mortgage has a low initial rate that adjusts annually afterward. 

7. Get Pre-Approved

Before you start house hunting, you will need to get pre-approved for a mortgage first. In fact, most real estate agents won’t even start showing you homes without one. Many sellers won’t accept any offer from a buyer that isn’t pre-approved for a mortgage.

A pre-approval letter means that you have spoken to a lender, and they have pulled a copy of your credit report and verified employment and income documents, and you should qualify for a mortgage.

Get Pre-Approved for a Mortgage

Documents Needed to be Pre-Approved

  • Income Verification – You’ll need W2’s, pay-stubs, and the last two years of tax returns. A loan officer will verify that you have been employed with the same company for at least two years and verify income sufficient for the amount of home you want to buy.
  • Asset Verification – The loan officer will verify that you have enough cash to cover the down payment. How much down you need to have to depend on the type of mortgage you’re seeking. At least 3.5% down can be expected.
  • Credit Report – A copy of your credit report will be requested. You’ll need to meet the minimum credit score requirements needed by your mortgage lender.

 

8. Work with an Experienced Real Estate Agent

Hire an expirenced real estate agent to help you through the home buying process. Some first-time buyers believe they can save some money by not hiring a real estate agent. This couldn’t be farther from the truth. You may end up paying for items that are usually paid for by the seller.

It would be best if you also never used the seller’s agent. The seller’s realtor works for the seller and will always have their best interest in mind, not yours. You should hire your own real estate agent. You can ask friends or family members for a recommendation or find one on websites like Trulia or Realtor.com.

9. Get Ready for Closing

After you have found the perfect house and your home offer is accepted, it’s time to close. It’s time for your final walkthrough before closing at a title company.

Your lender will tell you the amount you need to bring to closing in the form of a cashier’s check. You and your agent will also do the final walkthrough to ensure the house’s condition is satisfactory. All the final paperwork is signed, the home is transferred into your name, and you receive the keys.

In Conclusion

To buy a house, you need to have decent credit, a job with two years of provable income, and a debt-to-income ratio of 43% or lower. 

Make sure you get pre-approved before you start looking at houses with a real estate agent.

Once you find the perfect home, it’s time to submit your offer, have the home inspected, do a final walkthrough, and get ready for closing.

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