Your Finances
A Rundown of First-Time Homebuyer Finances
You’ve decided to purchase your first home in Denver, and now you will need to determine how you will pay for it. If you are considering purchasing your first home in the Denver-area, you will need to closely evaluate your finances prior to starting the process.
Lenders have recently adjusted to “risk-based” pricing, meaning that your credit score, debt to income ratio, and down payment have much more of an impact than they have in the past.
For a first-time buyer, here are some highlights to consider in these areas:
Credit Score: You can use a free online credit reporting service to check your credit. It’s best to do this directly with one of the credit bureaus (Equifax, Experian, or Transunion). Beware – many of these so-called “free” services will actually take your credit card information and force you to subscribe to their service.
It’s also important to remember that these sites’ self- generated score is not a mortgage-based credit score. It is designed to provide a score based on the models for consumer credit such as credit cards and auto loans. Mortgage scores utilize slightly different models that may result in a different credit score that is usually lower.
If you’ve had credit issues in the past, you may still be eligible to buy a home – despite what the media is reporting.
The minimum score currently for most loan programs is a 620, but some programs will go even lower. This means that potential buyers with bankruptcies, late payments, defaults, collections, and even judgments may still qualify. Each scenario is different. The bottom line will always be your total credit picture.
The biggest error that many younger, first-time buyers make is not establishing credit. It’s often feared that opening a credit card will cause the cardholder to over spend, resulting in negative credit consequences. If this is your concern, there are manageable ways to establish credit with either prepaid cards or gas cards
It is far better to establish positive credit. More often than not, those who don’t establish positive credit have nothing but negative items reporting on their credit report, including things like medical collections, missed cable bills, bounced checks, or unpaid parking tickets. Without positive credit items to counteract the negative, the resulting score is often too low for a home purchase.
As with all things, responsibility is the key to managing credit.
If you have established credit and are preparing to purchase a home, be contentious about making all payments on time, including rent. Even though it doesn’t appear on your credit report, many loan programs will verify rental history for a minimum of 12 months and up to 24 months. Being even 30 days late on your rent payment can halt your home buying process in its tracks.
With all loan programs, judgments will need to be paid prior to closing as will most collections. FHA will allow some medical collections to remain open.
Debt to Income: This calculation evaluates your total gross monthly income and subtracts all of your fixed payments, including things like auto and student loans (except those in deferment for 12 months from the date of closing), credit cards, child support payments, etc.
The standard calculation utilizes 28 percent of your monthly gross income for housing expense and no more than 45 percent of your gross income towards total debt, including the list above. If your credit score is above 700, you may be able to push these ratios slightly.
This means that if purchasing a new house is your goal, you should hold off on buying a new car – a $500 per month car payment might havoc the debt to income ratios.
Down Payment: Very few first-time homebuyers in the Denver-area are able to purchase their first home with a 20 percent down payment. This is s an ideal scenario for avoiding mortgage insurance, but it is not necessary. FHA still allows for financing with 3.5 percent down (or $100 if you purchase a HUD home), VA allows for 100 percent financing, and many conventional loan programs are available with 5 percent down. The lower down payments on conventional loans will require a higher credit score.
For FHA and VA loans, your down payment may be gifted by a relative.
In addition to a down payment, you’ll also need to have funds for the closing costs, which typically average 2.25 percent to 2.5 percent of your purchase price. These costs include the lender fees for your loan, the title fees to ensure clear title to your home, insurance, taxes, etc. These funds can come from the seller, but remember it’s ultimately your money. Any credit you request from the seller will be factored into the final purchase price one way or another.
For more information on first-time homebuyer finances, please contact Mary Steinmeyer at 720-339-0526.
Mary Steinmeyer
Licensed MB100017382
Certified Mortgage Lender
(720) 339-0526
FAX (303) 583-8832
mary@marysteinmeyer.com
www.marysteinmeyer.com
Mountain Crest Mortgage
724 South Pearl Street
Denver, CO 80209
www.mountaincrest.com