Last updated on September 11th, 2020 at 11:14 pm

Last Updated on September 11, 2020 by

Perhaps you are one of many who are asking this question, “Can I qualify to buy a house?”. If you have never purchased a house, this is a valid question. Readers who have purchased a house and have experienced hiccups with their credit, “can I qualify to buy a house” is also a good question to ask.

Several calculators are available on this site for your use as you go through this article. Click here to visit our Calculator and Tool section of the site.

There are several moving parts here but to simplify the process lets go through the steps necessary for a successful purchase and you can perform a self-evaluation along the way. We start with income.

INCOME

Do you have a secure source of income? This can include a job where you are paid every two weeks or other period. If you are an employee of a firm, you will have received a W2 form at the end of the year.

If you are a 1099 earner meaning that you are not an official employee but you received a form 1099 at the end of the year. This income should be received on a regular basis and reported on last years income tax return.

Retired persons can obtain a mortgage loan by proving their source of income to include Social Security and pension income. It’s those regular payments that make it easier.

Investment income is also a reliable source of income if that income is reported on your tax return from a broker or from rents received. Documentation is important.

If you can not prove that you have a source of income that will cover the mortgage payment and other expenses, you will have great difficulty obtaining a loan.

RATIOS

This is a way for the lender and the government to determine if you earn enough to make the mortgage payments. The maximum ration of debt to income is 50% on government insured loans e.g. FHA.

What this means is that the total of your principal, interest, insurance, and taxes paid on your property can not be more each month than 50% of your total gross income. Your gross income is before deductions for anything including income taxes.

At this point, you have determined that you have a consistent source of income and that your debt to income ratio is not more than 50%. Good, continue.

CREDIT

Forget trying to guess your credit score. There are many sources that use many different types of scores. Your lender will use their own version of a score that they modify. Your FICO score (there are many of these also) may indicate for example 720 but your prospective lender indicates 680.

There are score minimums to qualify for government loan support. What does this mean? Most lenders do not retain your loan. They sell it to the U.S. Government or mortgage bond firms. In order to sell your debt, it must meet some requirements e.g. debt to income ratio.

Basically, the higher your credit score, the lower your interest rate. It is in your best interest to have a high score but it takes time to build a great score. If you are interested in buying a home now, you will have to deal with the score you have.

Underwriters (people at lenders who check details about you) want to see that you have been making payments on time. Although this is reflected in the score, it’s important to show that you will in fact pay them when they advance funds for the loan. Your past performance is an indicator.

I have seen people get loans when they have collections and other negative items on their report because other factors balance out the negatives.

NO CREDIT

Can you get a loan if you have no credit? Perhaps. If you are just starting out or have not applied for an auto loan or credit cards, that is not bad news. Working with the right mortgage broker who understands working with young, inexperienced borrowers is key.

A mortgage broker can make a preliminary determination about your creditworthiness without requesting a credit report. Be prepared to show the mortgage broker a copy of your credit report. You are entitled to a free credit report each year by federal law. Go to the Federal Trade Commission website by clicking here.

Bring to the meeting or email a copy of last years income tax return and the last two months payroll check or other proof of income documents. The mortgage broker then tells you on a preliminary basis if it’s worth a few points on your credit score to run a credit report.

HOW MUCH HOUSE CAN I AFFORD

You have already determined that your debt to income ratio is 50% or less. This is a starting point to determine how much house you can afford. The following is an example:

Total sources of provable monthly gross income: $3,000

Total debt = 48% of gross income =$1,440

Remaining income available to pay mortgage payment = $1,560

Ok, you know now that you can spend up to $1,560 on your mortgage to include, principal, interest, taxes, and insurance. Use this number with our online calculator to determine the total maximum purchase price of your future home.

To work out the actual maximum selling price of a home, you need to estimate the annual property taxes and insurance cost. If you are working with Logan-Anderson, we can estimate this information from public records and our experience with the area.

DOWN PAYMENT/CLOSING COSTS

This is an area that often causes people to delay buying. Some believe they need to save for big down payment. This is not actually true. Generally, a home is purchased with a down payment of 20% of the purchase price. I say generally because there are options.

Understand that the more you put down on a home purchase the lower the monthly payments. However, in this ultra-low interest environment, even those with less than stellar credit can obtain a good rate which may be lower than what you could earn from other investments.

For example, if your home interest rate is 4%, and you are buying a home valued at $150,000 and putting down 20%, you must come up with $30,000 to buy. Assuming that you decide to take one of the 3.5% government-backed loans you will have to $5,200 as a down payment.

Assuming that you have the full 20% downpayment, you can take the savings of $24,800 and invest that money earning more than the interest rate of 4%. Plus you have access to that cash in the event of an emergency.

The point is not to put down more than you have to purchase the property. This assumes that the higher monthly payment paid due to the lower down payment is something you can afford and will fit into the ratio.

Closing costs are part of the cash required to close. These costs include advance payment for taxes and insurance to the lender so that they can be assured there are sufficient funds to make those payments when they are due. The costs also include the cost charged by the closing agent (attorney or escrow).

Loan costs include several items

Loan costs are also part of the closing cost fees. Your lender wants a payment at the time of the sale for their services. In some cases, their origination fees can be folded into the loan (increasing the amount you owe).

The loan and processing costs are about the same regardless of the price of the property. For a $150,000 property calculate about $4,500. Depending on the cost of insurance and property taxes that could to to $6,000 or a bit more. This is just an example for this article. Logan-Anderson will have more accurate numbers to use in their initial analysis.

How much cash do I need to buy a house?

To summarize the above, you will need the down payment which can be as low as 3.5% of the purchase price and closing costs of between $4,000 and $6,000 to purchase a $150,000 house. Actually the same numbers can apply to a house of $250,000 as well.

Use this calculator to help understand the process

There are options to explore. Some programs will assist new buyers with down payment funds. Some can allow rolling in some closing costs into the total mortgage due. Logan-Anderson on occasion has asked the seller to pay some or all of closing costs (there are limits by law).

The point is that you have options. Do not assume that you will not qualify to buy a house. If you have provable income, and your credit score meets lenders minimum requirements (they have changed twice in recent months) you are a candidate for owning your own home.

If I do not qualify to buy now, can I buy in the future?

This is what we tell anyone who does not meet one or more of the minimum requirements. It may be possible for you to set on a course to repair your credit if that is the issue. If you are out of work but will be reemployed in the future, you can reapply then.

Logan-Anderson can sit down with you and create a play for you to eventually own a home. If this is your dream to own your own home, we would be pleased to meet with you and discuss how we can help you.

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