Are you considering homeownership? You may be wondering if you need a certain credit score and amount saved, or if there’s enough room in your budget for a mortgage payment. Maybe you want to know if there's a right time of year to buy. Here are 3 factors to consider when it's the perfect time to buy a house.
Is Your Credit Mortgage-Ready?
Lenders will check your credit reports and scores from one or more of the three credit bureaus—Experian, TransUnion, and Equifax—when you apply for a mortgage. Your credit profile will help determine if you’re eligible for a home loan and how much the lender will charge you in interest.
A higher credit score can increase your chances of qualifying for a mortgage and one with a lower rate, saving you thousands in interest over the life of the loan.
You start the process of getting your credit mortgage-ready by obtaining free copies of your credit reports from the three bureaus at AnnualCreditReport.com. If you spot any inaccuracies, file disputes immediately to resolve them, as they could be hurting your score. It’s also ideal to check your credit score with Experian and the other credit bureaus to know where you stand.
Here are some general guidelines on minimum credit scores required for mortgage loans:
Conventional loan: Most lenders prefer a minimum credit score of 620.
Jumbo loan: Varies by lender, but the credit score requirement is generally 680 or above.
Federal Housing Administration (FHA) loan: 580 minimum credit score (or 500 with a 10% down payment).
U.S. Department of Agriculture (USDA) loan: no minimum credit score requirement, but most lenders prefer a score of at least 580 to 620.
U.S. Department of Veterans Affairs (VA) loan: Most lenders require a minimum credit score of 640.
Lenders consider other factors when evaluating your application, so meeting the minimum credit score doesn’t guarantee you’ll be approved.
1. Do You Have Enough Saved for a Down Payment?
Putting down 20% of the home’s purchase price is ideal if you want to save a bundle on interest, have instant equity in your home and avoid paying for mortgage insurance. If that isn’t workable with your budget, keep in mind that many traditional loan products require at least 5% down, and government-backed mortgages typically have lower down payment requirements.
FHA loans only require 3.5% down if your credit score is at least 580; borrowers with scores between 500 and 579 must put 10% down. And if you qualify for a USDA or VA loan, you may be able to finance your new home with 0% down.
2. Can You Afford the Monthly Mortgage Payment?
A mortgage calculator is an ideal way to determine how much home you can afford. But the monthly payment for principal and interest isn’t the only figure to consider. There are also annual property taxes, homeowners insurance, building association dues (if applicable), and repair costs to consider. You could also be responsible for mortgage insurance if your down payment is lower than 20%.
Lenders will also calculate your debt-to-income (DTI) ratio or the amount of your monthly income that’s used to cover debt payments. Many mortgage lenders prefer a DTI of 36% or lower.
3. The Best Time of the Year to Buy a House
If your credit score looks good and you’ve saved a down payment, your next consideration maybe when to buy. The largest selection of homes is generally available from May through August, according to Zillow.
But if you’re more concerned about getting a good deal and aren’t worried about having a lot of houses to choose from, consider waiting until the fall or winter months to shop, as there are usually fewer buyers seeking homes.
Ultimately, you need to carefully evaluate your financial situation to decide when you’re ready to buy a house. It may be best to rent and continue planning for homeownership until the time is right.
Allison Martin is a Certified Financial Education Instructor (CFEI), syndicated financial writer, and author. Her work has been featured in The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also teaches the essentials of personal finance through seminars and workshops.