Buying a first home can be exciting, especially for first-time homebuyers. Following this advice for homebuyers should lower your stress level and create a good experience. It’s important to determine how much home you can afford before you go home shopping. And it will help you negotiate for your house if you have a pre-approved mortgage before you make an offer.
Advice for Homebuyers With Bad Credit
Gustan Cho Associates Mortgage Group specializes in advice for homebuyers with bad credit, self-employment or other issues. HUD, the parent of FHA, has the most lenient guidelines when it comes to qualifying for a mortgage with bad credit.
Here are basic FHA Guidelines:
- 580 credit scores
- 3.5% down payment
- Down payment can be gifted 100% by a family member
- 6% sellers concessions by sellers for home buyers so no closing costs
- Lenders can offer lender credit if buyers are short of closing costs
- Outstanding collections and charged-off accounts do not have to paid off
- 2 year waiting period after Chapter 7 bankruptcy discharged date
- 3 year waiting period after housing event (foreclosure, deed in lieu of foreclosure, short sale)
- No waiting period after Chapter 13 Bankruptcy discharged date
- Can purchase a home while in a Chapter 13 Bankruptcy payment plan
Need 12 months of timely payments to Chapter 13 Bankruptcy Trustee to qualify.
Choosing a Home
The home buying process can be a long journey. Your first step should be mortgage prequalification. That will tell you what you can afford to spend for your home.
Next, decide what home you want and where you want to buy. Consult with a realtor and consider what you need in a home. Is a condominium or townhouse a better choice for the needs of the family or a single family home? How far is your workplace? How large of a home does your family need? Do you have children and pets and if so, is a larger yard needed?
Keep in mind these cost-related factors. Larger homes have more expenses and costs more for utilities — can you afford it? Bigger yards require more landscaping and maintenance.
Location is one of the most important factors. City living may be more convenient due to the many amenities such as dining, shopping centers, public transportation, and proximity to everything. City living may be a positive factor to home buyers with no children or pets. You can probably get more house for the money if you purchase a home that is located in a rural area but may spend more time and money in travel costs.
The mortgage pre-approval process is the most important stage of the mortgage loan application and mortgage approval process.
Not all lenders have the same mortgage requirements. Pick a lender that works with borrowers similar to you.
Anyone with an 800 credit score, solid documented income, low debt to income ratios, perfect credit payment history, no derogatory credit items can get qualified with any lender. Are you a perfect applicant who can focus exclusively on mortgage rates? Or do you need help with mortgage approval? Do you need a self-employed mortgage?
If you are not a 100% perfect applicant, avoid companies that have mortgage lender overlays.
What Are Lender Overlays?
Lender overlays are additional guidelines on top of the federal minimum mortgage lending guidelines.
For example, the minimum credit score requirement to qualify for a 3.5% down payment home purchase FHA Loan is 580. However, most lenders will not accept borrowers with a credit score under 620. This is called a credit score overlay.
Most lenders have debt-to -ncome ratio overlays. HUD allows up to a 56.9% debt to income ratio for FHA financing. However, most lenders will cap debt to income ratios at 45%. This is called a debt to income ratio mortgage overlay.
Homebuyers should familiarize themselves with mortgage lending guidelines.
Don’t Give Up
If you go to a lender and are told that you do not qualify for a mortgage, ask for the reason that you don’t qualify.
Is it because of not meeting the federal guidelines or because of the particular lender overlays? Unfortunately, most lenders who have overlays will not refer borrowers to other lenders. They will not tell borrowers they can go to a different lender with no overlays and just tell borrowers they do not qualify for a mortgage.
Over 75% of our borrowers are folks who were told they do not qualify for a home loan by other lenders.
Pre-Approval vs Affordability
Before looking for a home, you should prequalify with a mortgage lender. Your loan officer will ask you about your income, debts, and savings. Then you’ll get a preapproval letter stating what you should be able to afford for a home. That information should keep you away from homes you can’t afford.
Before you actually start shopping seriously, however, you should apply for mortgage preapproval. This is also called credit approval. It means you apply for a home loan, supply all the documents the lender wants, and (hopefully) get a preapproval letter.
Mortgage preapproval means the lender has approved you and as long as the property meets its guidelines, you should be able to close your loan. Mortgage preapproval is almost as effective as a cash offer,
Maximum Loan Amount
Mortgage preapproval letters state a maximum loan amount for which you qualify. However, mortgage lenders don’t consider all of the expenses you might have.
Some folks may have ongoing medical expenses, education expenses, child care, and other personal expenses. You might be planning to start a business or have a commitment to a savings goal or charitable giving.
You also need to consider the fact that as a homeowner, you will need to maintain your own home and budget for home repairs and/or home improvements. Expenses like water bills, scavenger service, landscaping services, and snow plowing services that were included as a renter are now your responsibility.
A better way to arrive at your maximum loan amount is to decide what you are comfortable paying each month. Maybe start with your current rent. Decide where the extra money will come from if you decide to increase your monthly housing cost.
Finding a Real Estate Agent
Once you have a solid pre-approval letter, interview real estate agents or shop for homes online.
- Choosing the right real estate agent is extremely important.
- Real estate agents should be full-time, local, and familiar with the neighborhoods you have chosen.
- They should be available 7 days a week and return phone calls promptly and be ready to provide advice for homebuyers.
- If you need to leave multiple messages and the real estate agent does not return your phone calls for days, it is best to find a different real estate agent.
- A real estate agent should be knowledgeable, know the location and the amenities in the area you are purchasing your home.
- A good agent gets along with mortgage lenders, attorneys, and title offices.
Once you have an accepted offer, it’s time to finalize your loan approval. Your loan officer will order an appraisal and submit it with updated income and bank statements if necessary.
Ask an Expert
I am a mortgage lender specializing in advice for homebuyers. I have no mortgage lender overlays so having a 580 credit score is no issue and having higher debt to income ratios is also no problem with FHA Loans. VA does not require a minimum credit score requirement. VA Loans does not have a maximum debt to income ratio requirement. However, most lenders will require a 620 credit score on VA Home Loans and may have a debt-to-income ratio cap. Gustan Cho Associates does not require a minimum credit score requirement on VA Loans. We do not have a debt-to-income ratio requirement on VA Home Loans.