This St. Patrick’s Day, luck doesn’t have to be limited to the Irish. Any potential homebuyer can find treasure at the end of the house-hunting rainbow. But instead of counting on the magic of a four-leaf clover, try following these proven methods for finding a house.
Get Your Finances in Order
Buying a house takes some groundwork; you need to be on sound financial footing and take actions to resolve any issues before you start searching for a new home. Here are a few financial prerequisites to keep in mind as you prepare to buy a home:
- Down payment. There are some ways to buy a home with no money down — one popular such option is a VA loan — but chances are you’re going to have to put down cash. How much? Most conventional mortgage programs require from 3% to 5% down. FHA loans, for example, require minimum down payments of 3.5% of the home’s sale price. While not realistic for many homebuyers, putting down 20% is ideal; that way you can probably avoid having to pay for private mortgage insurance (PMI) as you usually must when less than 20% is put down.
- Credit score. You won’t be very lucky in getting approved for a mortgage if you have a terrible credit score. What should your score be? While this differs with individual situations and lenders, often between 580 and 620 is the minimum score one can have and still get approved for a mortgage. So best to check your credit before the house hunting begins, and the three major credit reporting companies, Equifax, Experian, and TransUnion, are each required to give you a free report.
- DTI. Knowing your debt-to-income ratio is important; your lender will use your DTI to evaluate your mortgage application. A DTI of more than 43% is usually considered high, making the borrower more of a risk to the lender. To figure out your DTI, just divide all the debt payments you make each month by your gross monthly income. If you can, pay down debts to get your DTI as low as possible.
Mortgage Pre-Approval is Key
You might be tempted just to go for mortgage pre-qualification as you begin your home search. You’re just starting to look, so what’s wrong with just getting a general idea of the mortgage you might be approved for? Right? Wrong. While pre-qualification can be a helpful tool in getting a sense of how much you can afford to pay for a home, pre-approval offers a much more effective tool that can be determinative in getting the house you desire. Some real estate agents won’t even work with potential buyers unless they have pre-approved mortgages.
Pre-approval letters, which are issued by lenders after they thoroughly evaluate a potential borrower’s financial situation, tell sellers you mean business. While not a guarantee you’ll get financing, a pre-approved mortgage proves that you more than likely meet the conditions of the mortgage loan you’ll need to buy the home you’re bidding on.
Figure Out the Features You Want
What kind of home do you want to live in? And where? These are huge questions with a variety of factors that can at times feel at odds. From the number of bathrooms and bedrooms to proximity to schools and public transportation — it can all feel dizzying. You might seek some help from online features and amenities checklists to see what experts have to say about what homebuyers most look for when house hunting.
Making a list of the features you want will also help with any online searches. Both consumer sites and the Multiple Listing Service systems that realtors use have filters that narrow searches by these features. If, for example, you don’t want a home with carpeting, you can eliminate those with carpeting from your searches.
Understand How Long Things Take
Having some idea of how long you’ll be looking for a home can bring you peace of mind. The same holds true for understanding how long it will take to close on a house after your bid is accepted by a seller. According to the National Association of Realtors, homebuyers usually search for about eight weeks, on average looking at eight homes: five in person and three houses only online. Closing on a house often takes between 30 and 45 days. So, from your first look at home listings to having the keys to your new house in hand, you may be looking at about three months or more.
Choose the Right Real Estate Agent
While online tools are wonderful — and NAR data shows that a whopping 95% of homebuyers searched for houses online — there’s nothing like having an in-person real estate pro in your corner. So much so that 87% of recent buyers bought their homes with help from brokers or real estate agents. A small minority, just 7%, bought their homes from builders or their agents.
Most buyers go with the very first agent they speak to; 73% of homebuyers interview just one real estate agent. But you might not want to follow the masses here, as interviewing up to three potential real estate agents seems like a wise choice. Get a feel for each agent, see if you’re in sync about the kind of home you’re looking for and how you’d like to go about searching for it. As these chats with potential agents are job interviews, you might approach them as such.
Pick the Perfect Mortgage Professionals
This one’s easy — City Lending has been the right choice for many homebuyers and we’re likely the best lender for you too. Our team is ready with a wide range of mortgage programs to meet the unique needs of individual borrowers.
Your proverbial pot of gold might be anything from a cozy cottage to a large luxury home. But there’s one thing all potential homeowners share: partnering with the loan professionals at City Lending will probably make you a lot luckier.
Saving enough money to make a down payment on a home is at times the most difficult task that would-be homeowners face, and one that often prevents people from getting their dream homes. Even putting away the bare minimum of 3% down can be an insurmountable obstacle for some. For many of these folks, an 80/20 piggyback loan may be the solution. Let’s look at how one can buy a home with zero money down with an 80/20 mortgage.
What exactly is an 80/20 mortgage?
When you use an 80/20 mortgage to buy a home with no money down, you’re making one purchase with two separate loans. The first loan goes toward 80% of a house’s selling price; the second, as you may have guessed, is used to cover the remaining 20% of the home’s cost. The first is a traditional mortgage loan, often with a 30-year term at a fixed interest rate. The second loan is usually either a 15-year home equity line of credit or a similar home equity loan, often with a variable interest rate.
When closing on an 80/20 mortgage, the buyer will finalize two distinct loans, and each month needs to make two separate mortgage payments. Does it all sound somewhat convoluted, and maybe even unnecessary? It’s not. Here’s why.
Why use a pair of loans to purchase a house?
Most borrowers look to 80/20 loans to get two benefits: no down payment and the avoidance of having to pay private mortgage insurance (PMI) each month. The tactic does something of an end-run around a more traditional mortgage in which private insurance is required if the homebuyer puts down less than 20% of the cost of the home. Normally, when little or no money is put down on a home, lenders want the security that PMI provides in the event that there’s a default. However, with an 80/20 mortgage loan, the 20% that would normally need to be put down is covered by its own mortgage, so PMI isn’t necessary.
Who qualifies for an 80/20 mortgage?
As 80/20 loans do carry some risk for the lender, borrowers often need to have higher credit scores than they would need for some other types of mortgage loans. Lenders generally want a credit score of at least 700 and like the borrower to have a low debt-to-income (DTI) ratio, 45% or below is usually preferred. Plus, potential borrowers will have better chances of getting approved for an 80/20 mortgage if they have solid employment records, steady residency histories, and a reasonable amount of savings in the bank. While no single one of these factors will be determinative of approval, these are the main things that lenders will probably consider.
What are some of the benefits of an 80/20 mortgage?
Flexibility is a big one. As the second loan for 20% will likely be a home equity line of credit, its use isn’t limited to just paying off the home. After you pay down a portion of that loan, the credit line can then be used for any number of purposes, including the popular choice of cash for home improvements. Then there are tax benefits to consider with an 80/20 mortgage, as interest on mortgage loans — including home equity loans — may be tax deductible.
Do 80/20 loans have any restrictions I should know about?
This varies from case to case and lender to lender. There can be a cap on the amount of the second loan that’s for 20%, perhaps a limit of $100,000. A common requirement set by lenders for 80/20 mortgages is that the borrower lives in the home, using it as their primary residence, so purchasing investment properties isn’t generally possible with the 80/20 route.
What are some costs to consider with 80/20 mortgages?
As you will be closing on two mortgages when you buy your home, you may have to pay the closing costs on each. Though some lenders overlap these costs when issuing 80/20 mortgages. While closing costs on home equity lines of credit (HELOC) are usually lower than those for primary mortgages, they are not insubstantial, usually between 2% and 5% of the loan’s amount. And bear in mind that if the second loan is at a variable rate, that rate has the potential to rise; the historically low interest rates of the recent past were always bound to increase.
VA Loans: Another Way to Buy With No Money Down
An 80/20 mortgage isn’t the only option for putting zero money down on a home. Backed by the U.S. Department of Veterans Affairs, VA loans don’t require a down payment because the government guarantees that the lender will recoup up to 25% of the loan’s amount in the event of default. These loans are available to active-duty members of the military, veterans, and some surviving spouses, all verified as eligible with certificates of eligibility (COEs) they receive from the Department of Veterans Affairs. Beyond the no-money-down aspect, a big benefit of a VA loan is that you don’t have to get mortgage insurance as you do with other types of mortgages when there’s a down payment of less than 20%.
What are some requirements for VA loans? All eligible buyers must live in the homes they’re getting the loans for; VA loans can’t be used to buy investment properties. And there are generally funding fees to consider with VA loans, though some borrowers may be able to get these waived, as is the case with some disabled veterans and recipients of Purple Hearts.
Do you feel it’s time you owned your own home but don’t have quite enough cash for the down payment? If you’re on solid financial ground, an 80/20 mortgage may be the best way to realize your dream of becoming a homeowner. Contact us today to talk about how you may be able to buy a home with no money down.