The Challenges of Buying a House
It's not always an easy process to buy a home, regardless of what your friends might say. Many home buyers encounter obstacles, and it's not unusual to run into flying monkeys and wicked witches along that yellow brick road to home ownership. The first step in home buying is to prepare for the obstacles.
An experienced real estate agent can help you to find the right home, determine how much to pay and negotiate the offer for you. Moreover, an agent can guide you every step of the way throughout the home buying process. But that doesn't mean you won't encounter stumbling blocks or obstacles.
Finding a Down Payment
Unless you're independently wealthy or just won the lottery, you will probably need to get a mortgage. All VA loans, available to veterans, let a buyer put down zero. Most other loans, except certain types of special loan products offered to certain professionals, require a down payment. The two most popular types of mortgages are FHA loans and conventional loans, which require minimum down payments ranging from 3 percent to 15 percent of the sales price.
Obtaining a Minimum FICO Score
The two magical numbers are 620 for FHA and 720 for conventional loans with mortgage insurance. If your FICO score falls below that number, you may not qualify for those mortgages. For conventional loans without mortgage insurance, your FICO can dip as low as 620, but the pricing is ugly.
To find out your FICO score, you should ask your lender to run your credit report. You can obtain a FICO score online, but it will cost you, and it most likely will differ from the score your lender obtains. Your lender will pull your credit scores from 3 credit reporting agencies and take the middle FICO score.
Meeting Lender Ratios
Most lenders expect a buyer to have a maximum 33 percent front-end ratio. This means your mortgage payment, plus taxes and insurance (PITI), cannot exceed 33 percent of your monthly gross income. If you earn $5,000 a month, the maximum PITI payment for which you may qualify is $1,650.
The back-end ratio is trickier. This involves adding together your PITI payment with all monthly revolving debt payments. That percentage of your gross monthly income should fall between 41 percent and 50 percent, depending on the type of loan and lender. With mortgage insurance, your highest back-end ratio cannot exceed 41 percent, which means to qualify for a higher back-end ratio, you may need to put down at least 20 percent.
Receiving an Appraisal at Value
The Home Valuation Code of Conduct, HVCC, became effective May 1, 2009, and applies to all conventional transactions. Since January 1, 2010, it now applies to FHA transactions as well. It's a well-meaning process that has flaws and critics.
In the past, a lender could select its own appraiser. That appraiser was generally experienced, knew the neighborhood and had appraised many homes in specific areas, which typically would result in a fair and balanced appraisal. Now, appraisal management companies pluck an appraiser at random from a pool of appraisers. Your appraiser could be from another area or unfamiliar with the neighborhood, which often results in a low appraisal.
If the appraisal does not come in at value, and if the seller refuses to adjust the price, buyers with an appraisal contingency can either walk away from the transaction or pay the difference in cash.
Satisfying Loan Conditions
Underwriting can be frightening. An underwriter reviews the file and can make demands. Don't get upset, just deliver the documents. They write the rules. These demands can include more documentation, a review appraisal and, even then, the underwriter could reject the loan for a variety of reasons.
If you have remarried, for example, and your former spouse had owned a home that went through foreclosure or a short sale, if your name was still on the mortgage, you could be disqualified from buying a home with your new spouse.
The way to increase the odds of underwriting approval is to disclose everything about yourself and your financials to your lender and make sure the loan officer has been in the business long enough to foresee future problems before you get that far.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.