It’s pretty shocking, really. How many people have no clue what it takes to qualify for a home loan these days. Especially in hot areas, like the greater Seattle market. (For those out of this area, we’re talking about Seattle, the Eastside, and locations around Puget Sound).
As mentioned in a recent report by Fannie Mae:
“Current sources of mortgage education and information are insufficient. Even those actively planning to become homeowners in the next few years (i.e., those who should be exposed to more information) are only slightly more confident or knowledgeable than others.”
Wait, what?! Really, the report is a pretty interesting read. But I know you’re busy, so I’ll boil it down and hopefully help clear up a few things:
- Minimum Credit Score: Most of the survey respondents reported having seen their credit score recently, but only HALF could remember what it actually was. While most consumers think 680 is the minimum to qualify for a home loan, the minimum is actually just 580.
- Minimum Down Payment: Many consumers think you need at least 20% down, more think it’s 10% down. In fact, the minimum down payment is actually just 3%. That said, in many parts of this high-priced market, it can be challenging to compete with just 3% down. (Sellers like to see a higher down payment, indicating stability.) But it is possible to put just 3% down!
- Maximum Debt-to-Income Ratio: Most consumers think you need a debt-to-income ratio of at least 40%, meaning no more than 40% of your income goes to the mortgage payment. In reality, some home loan programs allow up to 50% debt-to-income.
Qualifying for a Mortgage: It’s Personal
Of course, this study wasn’t specific to a certain area. Yes, it can be tougher in a higher-priced market like we’re in. But that doesn’t mean a prospective home buyer can’t prepare! There are three very important things you can do to improve your position as a buyer:
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Know your credit score and work to improve it if needed.
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SAVE for a down payment.
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Talk with a lender (or 3) well ahead of when you think you actually want to buy.
Lenders are generally happy to help you plan ahead for a home purchase. Thinking you won’t be buying for a year or two? There’s absolutely no reason not to begin by talking with a lender now. Pulling together the financial details is a pain, yes. But much better to have a baseline so you can then prepare based on your financial reality. While a pre-approval is only good for a few months, it’s generally easy enough to refresh the pre-approval letter when it’s actually time to buy.
Not a First-Time Buyer? This Still Applies to You
For those of you who have been through this home buying rodeo before, there are still some things to know. First, things have probably changed since the last time you bought a house. Especially if that was back in the bubble heyday, when the only requirement to getting approved for a loan was having a pulse.
Second, I bet your income, credit, family, and/or work situation has changed since the last time. Be honest: Do you know what your credit score is now? Did you know what you need to have socked away for a down payment (before I told you, anyway)?
If you think you may be buying again in the next year or two, or perhaps you’re considering buying an investment property, vacation rental, or second home, it’s still a very good idea to talk with your lender. You will probably be surprised what you learn!
Preparation is Key
When you’re ready to know where you really stand, talk with one (or all) of these lenders. We’ve worked with each of them multiple times and highly recommend their expertise–and no, we don’t receive anything/kickbacks for the referral! We just know these folks offer great service. Remember, rates and programs differ by institution, and interest rate isn’t the only factor in finding the best lender and loan for your circumstances.