Low interest rates and good housing prices have combined to offer many young adults the opportunity to purchase a home, for about what they are paying for rent. If part of your new year’s planning includes home ownership, preparing beforehand is essential. Below are some questions from potential first time home buyers and offers advice on how to prepare to be a home owner.
What is the single most important component in buying a house? That would have to be your credit. Most mortgage programs require a 640 or higher credit score, with some exceptions down to a 620. Whether you plan to buy now or later, you should have your mortgage broker pull a standard, 3 bureau report to see where your scores are, and what you might need to do to get your credit in shape.
I’m paying $795 in rent right now. How much house could I buy for the same monthly payment? Your house payment will include taxes, insurance, and PMI (if you’re not putting 20% down), so $795 would roughly cover the payment for a $120,000 house, at today’s rates.
Could I buy a house with a friend, or do I have to be related to the other person I’m buying with? The only program that requires the co-borrower to be a spouse is a VA (Veteran’s) loan. All other programs allow non-related borrowers to purchase a home together.
I don’t have much saved for down payment. What are my options? USDA loans still require no down payment, but the house must be in a federally designated rural zone to use this program. Your mortgage broker can give you some general areas in the upstate that are eligible for this program. FHA requires 3.5% down, but that is allowed to come from a relative, as a gift. Conventional loans require that at least 5% down payment come from your own funds, but any additional down payment or closing costs can be received as a gift from a relative. Funds are considered “your own funds” when they have been in your personal account for at least 60 days.
How much house can I afford, given my income? The amount of house payment you can afford will depend on what percent of your gross income it takes to make the house payment, and also on the percent that is required to make your house payment and all other debt payments. As a rule of thumb, multiply your gross monthly pay (before taxes are deducted) by 0.3, and that is the maximum house payment you can afford. In general terms, a person making $30,000 a year can afford a $120,000 house. The best thing to do is to consult a good mortgage broker before you go house shopping. He can help you calculate your debt to income ratios and tell you exactly how much house you can afford.
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