Buying a home is not always an easy process. There are a few obstacles that you could face, especially if you’re buying your first home. Working with a real estate agent can help you find the best home, determine how much to pay and even negotiate an offer on your behalf. While a real estate agent can offer proper guidance throughout the home buying process, that doesn’t mean you won’t encounter obstacles along the way.
Knowing how to deal with the different stumbling blocks you may face when buying a home is what matters most. Here’s how you should overcome common home buying challenges:
Saving for a Down Payment
Unless you’re independently wealthy, you’ll most likely need to get a mortgage loan. Except for some particular loan products offered to certain professionals and VA loans, available to veterans, which let buyers put down zero down payment, almost all other loans require a down payment. Even the most popular loans: FHA loans and conventional loans need minimum down payments ranging from 3% to 15% of the sale price.
To overcome the challenges of saving for a down payment, consider these drastic steps:
- Transfer a reasonable fixed amount each month to a special savings account
- Skip expensive vacations for a year if you have to
- Lower your lifestyle expenses
- Reduce your high-interest rate debts like credit card debts
- Find ways to make extra income like getting a second job
- Sell off some of your investments or borrow from your retirement plan
Obtaining the Minimum Required FICO Score
If you’re planning to get an FHA loan or a conventional loan, the two magical numbers you need to know are 620 and 720 respectively. In case your FICO score falls below these numbers, you may not qualify for these types of loans. Before you even start shopping for a mortgage, it’s advisable to find out your FICO score by asking a lender to run your credit report. Lenders will pull your credit scores from three different credit reporting agencies to get an average.
In case your FICO score is low and your mortgage application gets rejected, don’t despair. There are different ways you can improve your low FICO score or credit score. Consider these steps:
- Try paying off large credit card balances, starting with the largest first
- Avoid opening up new lines of credit and don’t close old ones without consulting your lender
- Don’t be late on payments as it appears on your credit report
- Clear any other debts you have
- Repair any credit report errors if any
You can learn more about FICO scores here.
Meeting Mortgage Lender Ratios
Majority of mortgage lenders expect potential home buyers to have a maximum 33% front-end ratio. This simply means your mortgage loan payment, plus taxes and insurance (PITI), don’t exceed 33% of your monthly gross income. For instance, if you earn $5000 each month, the maximum PITI payment you may qualify for is $1650. The back-end ratio is even trickier, which should fall between 41% and 50% of your gross monthly income.
Understanding mortgage lender ratios can be complex, especially for first-time home buyers. A Flagstar article on how lenders qualify you for a mortgage explains a few things about mortgage lender ratios like how they determine your debt ratio. Before a lender gives you a loan, you have to meet certain standards that determine if you qualify for a mortgage. Consulting your lender or mortgage broker will help you understand what you need to do to meet these ratios.
Satisfying Mortgage Conditions
The underwriting process is perhaps the most frightening for first-time home buyers. You could be asked to provide more documents, pay for a review of the appraisal or your loan application could be rejected for a number of reasons. The best way to increase the odds of loan approval is to disclose everything about your financials and yourself to your mortgage lender and work with an experienced loan officer who can foresee any potential problems in the future.
Partnering with a local experienced real estate agent and the right mortgage broker will bring you a step closer to becoming a successful first-time homeowner. Just make sure to discuss your specific homeownership needs in advance.