How Much Do You Really Need to Buy a House?
Few investments pay off like buying a house. If you find a deal, it’ll be the gift that keeps giving year after year.
But not every how will fall within your price range. How much do you need to buy a house?
The answer might surprise you. Take a look at this guide to saving up to buy a house.
How Much You Need to Buy a House?
No two people have the same financial background. What you need to buy a house could vary drastically from someone else.
How is this possible if you’re buying homes in the same price range? The answer is that there are many things that contribute to your ability to qualify for a mortgage loan.
Just because you earn a similar salary as someone else and want a home in the same price range doesn’t mean you’ll pay the same out of pocket costs. Here are some things to consider when considering how much you need to buy a house.
The first thing you need to get a handle on when planning to buy a house is your credit score. Your credit score is the lender’s guide to understanding your level of responsibility.
It’s not necessarily a fair measure of whether or not you’re a responsible person, but it provides some baseline of how you handle money. You can usually add a note to your credit score explaining any negative items, but if there’s a long list of negative items your word won’t mean much.
Everyone is entitled to a free credit report every year. You can request a copy from the three major credit bureaus individually or use a site like freecreditreport.com to get all copies at once.
Seeing your credit report helps you to get a sense of what the lender will think about your creditworthiness. If you notice any errors, you can dispute them with the creditor to help boost your score.
Getting mistakes removed is one of the fastest ways to improve your credit score.
Debt to Income
Many people don’t consider the fringe costs of buying a home as part of the purchase. But underwriters commonly ask you to pay down debts in order to buy a home.
This means that your student loan debt might need to be repaid before closing in order for you to qualify. For some people, this means thousands of additional dollars toward the cost of buying a house.
You may or may not be prepared to cover this expense. It’s a good idea to look at your own debt to income ratio to learn where you might need to cut back.
The rule for most lenders is that borrowers must have all debt, including the mortgage loan you’re applying for, below 30 percent of their gross income. If you really want to be conservative, try keeping this percentage below 30 percent of your net income.
Make sure you have money set aside for potential loan or credit card payoffs requested by the loan underwriter.
Foreclosures and Bankruptcies
If you’re considered a high-risk borrower, you’ll have higher fees and a higher interest rate. Having a prior foreclosure on your credit report is one way you’ll be considered high risk.
Wait the 7 or 10 years for the foreclosure or bankruptcy to fall off your credit report if you don’t want it considered when you apply for a home loan. It can be the difference in hundreds of dollars per month on your payments or thousands in closing costs.
Buyers with strong financial profiles always get the best terms and deals from the builder. New construction homes commonly come with lots of extra perks like upgraded appliances, no closing costs or home warranties for qualified buyers.
Some builders go as far as helping buyers with down payments, but you have to at least qualify for the loan so that you’re a low risk to the builder.
The final factor that impacts your ability to buy a house on a budget is your negotiating power. Usually, this task is left to your realtor.
A good realtor should aim to get your closing costs and down payment down as much as possible. Rarely do buyers pay the conventional 20 percent down on a mortgage loan.
This is usually thanks to a realtor or mortgage broker offering financial resources through lending programs. If your realtor doesn’t seem to know about these resources, it might be time to upgrade your team.
Most buyers qualify for some type of relief even with bad credit. People with bad credit commonly qualify for FHA loans which require as little as 3.5 percent down on a house.
If you’re a veteran, you can also try for VA loans which have amazing terms as long as your credit is okay. Look into self employed home loans if you’re unsure you can qualify for a traditional loan.
Can I Skip a Down Payment?
It is possible to skip a down payment on a house. Buyers who qualify easily for a mortgage loan have the most negotiating power.
You can ask for the world when you know you have a strong income history and good credit. Use this to your advantage to save as much money as possible.
If your financial history isn’t so great, you can try boosting your score by simply making on-time payments and reducing your revolving debt. Credit card balances are dangerous to carry when buying a house.
It shows you’re spending more than you can afford to repay by using your credit card as a loan.
Buying a Home
How much do you need to buy a house? The answer is it’s up to you.
You can get your creditworthiness on track and work with a knowledgeable realtor to help get your costs down.
Many people shy away from realtors to avoid paying commissions, but they are worth their weight in gold when they have the right experience. For more information and tips, visit our blog for updates.