The olympics is over! However as participant in the home buying olympic there are three hurdles in front of you before passing the finish line of home ownership! Are you prepared? Here are the hurdles and how to clear them one after the other.
Fear of down payment
Home buying could be intimidating specially to first-time homebuyers. Many put it off or get discouraged because they don’t have enough money for down payment, they fear they get rejected due to low credit score, and they fear the ownership cost, taxes, etc.
Fear of a huge down payment requirement is largely a perceived barrier that doesn’t have much root in reality. If you ask most people “how much down payment is needed to buy a house?” you get a wide variety of answers, most of them incorrect!
In a 2015 survey by the Fannie Mae (Federal National Mortgage Association), 76% of people who were asked that questions either didn’t know or were misinformed about the minimum down payment required. They commonly believed that at least 20% down-payment is needed to buy their dream home.
In reality, many lenders finance mortgage loans with down payment as low as 0% to 6%. An estimated 30% of all homebuyers put down 3% or less of the cost of the home. There is huge difference between the myth and reality!
The minimum down payment for an FHA loan is just 3.5 percent of the home’s purchase price. That means the down payment for, say, a $250,000 home would be just $8,750 with this type of loan.
Even a low down payment may still be difficult for some buyers. It may take the typical millennial six years to save for a 6% down payment on a starter home. In Texas Travis County and the City of Austin have buyer’s help for qualified applicants in the form of 0% loan or outright grants. Also look here and here for more information for the first time home buyer.
Low credit score
Knowledge of the required credit score for mortgage qualification doesn’t score any better in the public’s mind. When asked about the required credit score, 59% of people either did’t know (54%) or were misinformed (5%) about what FICO score is necessary to qualify. Many people believe “you need a 780 FICO score or higher to buy a house”. Again, not true! Once again, the reality is far different from this perception.
According to the latest Ellie Mae Origination Insight Report 54% of the recently approved mortgages had a credit score of 600-749. Even with the new regulations put in place after the housing crisis of 2008-2009, the minimum required FICOs required are lenient.
- Fannie Mae and Freddie Mac: 620 minimum FICO score
- FHA loan: 500 minimum FICO score
- VA loan: No minimum FICO score
- USDA Rural Housing: No minimum FICO score
More information is required by the lenders than just the minimums FICO score. In addition to credit scores, lenders evaluate borrowers based on down payment, income, savings, and debt loads, too. And, if that seems like a lot of information, that’s because it is.
It’s so much information that mortgage lenders use Automated Underwriting Software (AUS) to make an approval recommendation.
In general, AUS findings work like this:
- Applicants with high credit scores and strong income, assets, and debt get approved
- Low credit scores applicants with weak income, assets, and debt get turned down
- Applicants in between those extremes, with countless individual cases are also get approved
Renting is always cheaper!
We all have hear that, but this is a ‘personal’ hurdle that you have to jump though. It is often stated that maintenance expenses and other cost of ownership that is not paid by renters, make owning a house more expensive. Although a a renter is not obligated to pay any of the ownership costs ‘directly’, those costs are passed through indirectly in the form of higher rents. On top of that, annual rent inflation (rent hike) should be a consideration as well.
Studies have shown that owning a home may be less expensive than renting in the U.S. Buying your first home with a fixed-rate mortgage can help you avoid unexpected annual increases. You practically lock in a monthly amount for the life of the loan; you know your housing costs for as long as you keep your mortgage, and it is not going to change!
Homeownership may also help you save at tax time. According to the IRS, under certain circumstances you can generally deduct the mortgage interest, mortgage insurance and property taxes you pay. Essentially, buying a home may cost you less in the long run — and you’ll be building equity in the home as well.
Bottom line,
Whether buying your first home or moving up to your dream home, make the mortgage process easier and avoid the pitfalls; be informed about your options. Your dream home may be closer than you think!