1. Qualifying Credit

Credit requirements vary by loan type and lender, but a buyer can qualify with a score as low as 580.

Many first-time home buyers worry that their credit score may be too low to qualify for a mortgage. However, you can qualify with a below-average score.

FICO scores fall on a scale between 300-850; with the national average being 710. However, some mortgage programs don’t have a credit score requirement at all.

Having a low credit score doesn’t automatically disqualify you from securing a loan. Since lower credit scores represent a risk to lenders, you may be able to qualify by offsetting that risk in other ways, such as adding a co-signer or providing a higher down payment. Consumers are entitled to an annual free credit report from AnnualCreditReport.com. The easiest way is by getting pre-approved for a mortgage loan.

2. Proof of Income and Finances

There are no set income requirements to purchase a house, and your monthly income isn’t the only determining factor. To purchase a home, you will need to provide lenders with the following:

• Proof of employment
• Financial History
• Monthly income
• Debts

If you’re a salaried employee, proof of income means showing pay stubs and a year-end W-2 statement. If you’re self-employed, you’ll need to show tax returns and evidence of your business. If you have a job offer letter but haven’t started work yet, you’ll need proof of the job offer signed by all parties.

When it comes to your financial history, lenders are simply looking for a pattern of paying bills on time.

Your monthly income and debt will be viewed together to establish your debt-to-income ratio (DTI), which simply compares how much you make with how much you spend. If you spend $30 of every $100 you make on your housing payment and credit debts, your DTI would be 30 percent.

The Consumer Financial Protection Bureau (CFPB) recommends that ratio be under 43 percent. Some lenders may still approve borrowers with a DTI of up to 50 percent, and sometimes more, depending on compensating factors. For example, having more money in savings, adding a
co-signer, or providing a larger down payment will improve your chances.

Low income or student loan debt won’t prevent your approval. You will need a history of paying bills on time and job-related income that gets reported to the IRS.

3. Cash Needed to Close on Your Home

There are programs that can help you purchase a home with as little as 3 percent down or no down payment at all.

USDA (U.S. Department of Agriculture) and VA loans have no down payment minimums. Low- and no-down payment mortgages are available to homebuyers with all credit scores. These loans are best for homebuyers with reliable income and not much savings.

Down Payment Assistance (DPA) programs can also help cover closing costs. Most first-time home buyers spend approximately 1-2 percent of the home’s purchase price on closing costs.

So, how much money do you need to buy a home? Assuming a home sale price of $350,000 with a down payment of 3 percent and closing costs of 1.5 percent, you could purchase your first home with as little as $15,750 down. If you utilize a Down Payment Assistance program, you could buy this home with $0 out of pocket.

4. Home Buying Budget

Home buyer competition can be fierce. The buyers who win are the buyers who are prepared. Knowing how much you want to spend on housing each month puts you in a powerful position — you’ll know when to push and when to move on to another home.

Budget for all steps of the home-buying process, which includes:

• How much to contribute to a down payment
• Expected closing costs
• Your preferred monthly mortgage payments

Once you’ve estimated your budget, set, or adjusted your savings goals as necessary, remember that your monthly mortgage payment includes five factors, commonly known as PITIA:

1. Principal — your mortgage payment
2. Interest — your borrowing rate
3. Tax — state property taxes
4. Insurance — homewoners' insurance
5. Association Dues — fee paid to a homeowner’s association (when applicable)

Only you know how much home you can afford to purchase. Banks will approve you for the maximum amount possible, even if it’s outside the amount you feel comfortable borrowing. A word of caution … only spend what fits your budget.

5. Mortgage Loan

Nearly 9 out of 10 home buyers use a mortgage to purchase their home. That’s why it’s important to understand the different mortgage options that are available to you.

There are five primary mortgage loan types, and each comes with its own set of rules:

1. Conventional mortgages: These loans require a 3 percent down payment and are usually best for buyers with a steady income, some money in savings, and a credit score of 620 or higher.
2. FHA mortgages: These loans require a 3.5 percent down payment and are available to buyers with lower credit scores.
3. USDA mortgages: Are designed to promote homeownership in rural areas, and these mortgages are backed by the U.S. Department of Agriculture.
4. VA mortgages: These are available to current and past U.S. military members; VA loans allow buyers to purchase a home without a down payment.
5. Portfolio mortgages: These loans are privately held by lenders; therefore, rules will vary from firm to firm. They typically require better-than-average income and credit.

Conventional loans are the most popular — 82 percent of first-time home buyers use them.

6. Mortgage Pre-Approval

Mortgage pre-approval is like a dress rehearsal for your final approval. Savvy home buyers always get pre-approved before house shopping because pre-approvals:

• Will help you determine how much house you can afford
• Provide an itemized estimate of all costs involved
• Allow you to make a serious offer on a home
• Will reveal potential improvements in your application to get you a better mortgage rate and terms

During the pre-approval process, lenders review your income, assets, and credit report to determine how much you can borrow and at what interest rate.

Typically, pre-approvals are good for 90 days because your situation may change between the time you get pre-approved and the time when you make an offer. If you’re coming up on the 90-day expiration date, contact your lender in advance to have it refreshed.

You may also hear about getting pre-qualified for a mortgage. This is different from getting
pre-approved. Pre-qualifications take estimates and don’t typically verify your financial documentation; a pre-approval does.

7. Real Estate Agent

In the United States, a home buyer’s real estate agent is paid by the seller. It doesn’t cost the purchaser to have an agent. Because you aren’t footing the bill, it would be wise to secure the best agent you can find.

An experienced real estate agent helps you:

• Find homes in your preferred price range and location
• Negotiate with the seller and seller’s agent
• Draft and submit your offer

An agent can make or break your deal, so we recommend that you spend some time finding the right person. Meet with and interview several agents until you find someone you feel confident will help you find your dream home.

Ensure you have your own representation. When one agent represents both the buyer and seller, it’s called a dual agency. At all costs, avoid dual agency. This could result in the worst service for both buyer and seller and often favors the seller.

Final Thoughts

Now that you have your pre-approval, a stellar agent, and know your budget, now comes the fun part … it’s time to start touring open houses and doing some serious house hunting.

Home-buying is not like car shopping. When shopping for a car, you look for a model you like, request a color. or leather seats. However, when you’re shopping for a home, it comes just the way you see it.

That’s why it’s important to know your must-haves, nice-to-haves, and deal-breakers before viewing homes. Understanding what you can and won’t compromise on will help you know when to jump on a listing and when to walk away.

Another key consideration is location. Scope out the neighborhoods and communities you’re interested in to find a home you’ll love for years to come!

And contrary to popular belief, you don’t need 20 percent down and a credit score in the high 700s to buy a home. By getting pre-approved, avoiding dual agency, and sticking to your budget, you will become a competitive buyer.

Happy home buying!