Although the internet can be a great resource for a variety of information, a lot of that information is incorrect. One of the most important and expensive decisions in your life, home buying, tends to circulate a lot of misinformation. Most of that misinformation is in regards to how much of a down payment you need or what your credit score needs to be. Let's go over some real facts about buying a home and knock those myths out, so they don't hinder your ability to purchase!
1. CREDIT SCORES
Though it may come as a surprise, you don't need a perfect credit score to purchase a home. Traditional bank lenders will work with credit scores as low as 640, but your agent can also get you connected with local lenders that accept credit scores as low as 580. Although there are other required stipulations to qualify for the loan, you don't need a perfect score in the 700's or 800's to get approved for a mortgage.
2. YOU NEED 20% FOR THE DOWNPAYMENT
You don't have to sell an arm and a leg to be able to purchase your dream house. There is a huge misconception that you need to pay a minimum of 20% down to buy and that information is very outdated. These days, there a large variety of loan programs that only need an average of 3-5% down. Based on your income or military status, you may even qualify for mortgage programs that require 0% down. Although you'll expect to pay an additional 3% in closing costs, which is separate from the down payment, this is still significantly less that 20% of the purchase price. If you're in a buyer's market, you may even be able to negotiate for the closing costs to be covered by the sellers.
3. YOU HAVE TO PAY OFF ALL YOUR DEBT TO QUALIFY FOR A MORTGAGE
Mortgage lenders will look at your monthly debt obligations when calculating your debt-to-income (DTI) ratio. This will determine how much of your monthly income is available for a mortgage payment. Your DTI is measured by dividing your monthly debt payments (including, but not limited to, student loans, car loans, credit card bills, housing costs and more) by the amount of your monthly income. The lower the number, the better your chances of qualifying for a mortgage. While most banks prefer to lend to those with a DTI of 43 percent or less, there may be options out there for people whose DTI ratio tops out at 50%. In some scenarios, paying off all of your debt can have a negative effect on your credit score. So, while it is an excellent idea to minimize your debt when preparing to buy a home, you don't have to pay off everything.
4. THE FIRST STEP IN BUYING A HOME IS LOOKING FOR ONE
This is the most common misconception of the entire home buying process. Most people think that they will start looking at homes and then get financing lined up after they find the house. The very first thing you should do is find either a licensed real estate professional or mortgage lender to start get mortgage prequalified. This will tell you the exact amount of the mortgage you qualify for and will help your realtor only show you homes within that budget. There is nothing more heartbreaking than finding the home of your dreams and realizing that it is outside your budget. Additionally, getting prequalified will show your realtor that you are serious about your home purchase.
5. YOU CAN GET A BETTER DEAL IF YOU GO THROUGH THE LISTING AGENT
When a seller hires a realtor to sell their home, they sign an agreement that spells out all compensation paid to the agents. Most of the time, the seller pays all agent compensation because it is written into the listing agreement, and rare in the Houston Market for the buyer to pay any agent commission. That being said, if a buyer waives the right to their own representation, the listing agent simply collects the commission that would be paid to the buyer's agent. Remember when approaching a listing agent that their fiduciary responsibility is to the seller. They can communicate your offer to the seller but they do not represent you, nor are they working to get you the best deal. So, if the seller is already paying for you to have a representative that will protect your financial interest, why wouldn't you have one? Protect your investment and have a buyer's agent.
If you have additional questions, Contact Me directly and we can discuss your specific situation. Don't let online myths persuade you into thinking you can't qualify or afford to buy a home.