Financing is the first step. It’s difficult to start looking at houses when you are not aware of the details of your financing. Of course, you’re always welcome to connect with me to start the process out but here are a few tips to getting your finances in order and making it a better experience.
Keep in mind that these are the basics and are a general rule of thumb. As you know, there are exceptions to every rule. Also remember, every piece affects the outcome so in order to have the best outcome, every detail needs attention. For example, if you have 20% down but a 660 credit score, you won’t have as good as an option as 20% down with a 760 credit score.
Spiffing up your finances and talking to your local bank is the first step to getting your financing secured. Though it’s nice to have options, be cautious with visiting too many banks as well because each check into your credit and background can affect your credit score.
Here’s what you should have together when you go in to talk to your local bank in an attempt to get the best loan package on a conventional loan.
To Get The Best Package On A Conventional Loan…
1. 20% Down
Make sure you have 20% down. The reason 20% down is ideal is because often 20% down on a conventional loan eliminates the need to pay for private mortgage insurance (PMI). PMI is “a risk-management product that protects lenders against loss if a borrower defaults. Most lenders require private mortgage insurance (PMI) for loans with loan-to-value (LTV) percentages in excess of 80% (the buyer put down less than 20% of the home’s value upon purchase).” [Source: investopedia.com]
Of this 20% down, you need to have at least 5% of your own funds. The other 15% of those funds can be a gift or secured loan, in most cases.
If you don’t have 20% down, you can typically have as little as 5% down but you will need PMI at that point.
2. Credit Score +660
As many of you know, the higher the score, the better. But, at minimum, to receive the best options and rates on your mortgage, you should have your credit numbers over 660.
It’s best to get all three reports. The companies you’ll be looking at retrieving your report from are Equifax, Experian, and TransUnion. If your credit doesn’t meet those minimum requirements, we have some repairing to do.
3. Debt to Income <36%
“To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.” [Source: consumerfinance.gov]
Your debt to income ratio should be under 36%-45%.
4. Work History >2
The other item that your bank will need is your work history. You should have at least two years at your current job. Many banks will still be able to work with you if you’ve had less than two years at your current job because you’ve changed jobs, however, it needs to be within the same or a similar field.
Why a Conventional Loan?
As a general rule of thumb, The advantage of a conventional loan is that you can buy a house in an “as is” condition. Government loans require that your home meet certain conditions before you can purchase it. So if you’re a roofer and you want to replace the roof yourself, you can do that with a conventional loan but you may not be able to do that with a government loan. And, of course, every rule has an exception.
When you’re ready to start your search, or need help navigating the process, don’t be afraid to reach out and contact me!
*This is basic, general knowledge. For more exact information, please refer to your local bank.