It seems that the American public is still somewhat confused about what is required to qualify for a home mortgage loan in today’s housing market. The results of the National Association of Realtors (NAR) Study found that the main reason that non-homeowners do not currently own a home is they don’t believe they can afford one. So what does affordability of the house mean, it’s not a straightforward as many other purchases that you make. Many years ago home loans were only for people with perfect credit and a 20% to 50% down payment. When it comes to perceived affordability the two major misconceptions we should talk about are:
1) Down Payment
The NAR’s survey revealed that consumers overestimate the down payment funds needed to qualify for a home loan. According to the report, 39% of non-homeowner say they believe they need more than 20% for a down payment on a home purchase. Well, that used to be true a few decades ago, but that’s no longer the case these days. In actuality, there are many loans written with a down payment of 5% or less. Many new programs have emerged allowing less cash out of pocket. With an FHA or VA loan you can put 5% or less down and with down payment assistance programs, such as the Washington Bond loan program, you don’t need thousands of dollars in the bank, you can have a loan for your down payment attached as a second mortgage on your house and pay no down payment out of pocket.
2) FICO scores
The next big misconception is that you need excellent credit to buy a home. Most perspective home buyers think a “good credit score” is over 780. In actuality the average FICO scores of those who are approved for mortgages are much lower. The average FHA loan closed with a score of 683 in August 2017. Average homebuyers credit scores are the lowest levels in years according to Ellie Mae, which processed 3.7 million loan applications last year. Though it is possible to get a loan having credit in the 505-579 range, it is difficult to qualify and it is recommended that you work on increasing your credit score above 580. A 580 score is the minimum score most reputable mortgage lenders require for an FHA loan.
If you have been thinking about purchasing a home and are ready, able and willing but not sure if you’re able to financially. Sit down with a professional who can help you understand your true options.