The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Think You Can’t Buy a Home? You Could Be Totally Wrong
Most renters say they want to buy a home someday — but many think they wouldn’t qualify for a mortgage. If you’re in this group, or if you’re a current homeowner looking to upgrade and you’re worried you can’t get financing, you might not have all the facts.
A 2019 study conducted by Fannie Mae found that the majority of consumers responded incorrectly to questions about down payment requirements, debt-to-income limits and the minimum credit score needed to get a mortgage. The takeaway from this: There’s hope even if you don’t have perfect credit or if you have a giant student loan hanging over your head.
Ready to see how your home buying knowledge stacks up? Answer these three quick questions to see how your ideas line up with the realities of qualifying for a mortgage.
Debt & Income
Your debt-to-income ratio is calculated by dividing your monthly income by your monthly payments. This number, shown in a percentage, gives lenders an idea of your ability to manage your debt payments once a mortgage is added to the mix.
1. What is the largest debt-to-income ratio that you can have and still potentially qualify for a home loan?
Correct answer: D
If your loan is underwritten through an automated underwriting system, you could have up to a 45-50% debt-to-income ratio and still potentially qualify for a mortgage (though approval at 46-50% is rare). Remember, that is the maximum amount allowed. If your loan is manually underwritten, or you’re getting a “Jumbo Loan” for a considerable amount (over $484,350 in the Phoenix metro as of 2019), the debt-to-income ratio requirements are stricter.
Your credit score tells lenders how creditworthy you are — that is, how likely you are to be able to repay the loan and how much of a risk it would be to lend money to you. There are several companies that will provide creditors with your credit score on request. One of the most commonly known is FICO®. Your FICO® score is a three-digit number that ranges from 300 to 850.
2. How low can your FICO score be in order to still qualify for a mortgage?
Correct answers: B
This one isn’t as black-and-white as you might think. Nearly a third of those surveyed chose 620, while 14% thought a minimum score of 680 is required.
While some lenders will qualify buyers with a FICO score as low as 550 and above according to this CNBC article, that’s not the norm. For example, the government sponsored Fannie Mae — a national lending powerhouse — requires a minimum FICO score of 620. The Federal Housing Administration (FHA) does allow for lower credit scores depending on other factors, but that would depend on your individual situation.
At Desert Financial, buyers with a score of 620 and above who meet our other loan qualifications (income requirements, debt-to-income ratio, etc.) would be likely to qualify for a home loan. Have a credit score under 620? Meet with a loan officer about lower-credit alternatives; even if you don’t qualify now, they can provide info on ways to increase your credit score.
Typically, you will make a down payment on a home you are purchasing, along with paying for a home inspection and closing costs. Sometimes, potential homeowners can find specials like our Participating Broker Program, which includes $500 toward your closing costs.1
3. What is the minimum down payment you will need?
Correct answers: A and B
This one has two correct answers — and many respondents to the Fannie Mae survey didn’t choose either one of them. Despite what 13% of those surveyed said, you don’t need to save up for a 20% down payment. The 1 in 5 who chose 6-10% were slightly closer.
At Desert Financial, potential homebuyers can get conventional financing with as little as 3% down! FHA loans require just 3.5% down, and some buyers can even qualify for zero-down options through Veterans Affairs or the U.S.D.A.
1Participation in the Real Estate Broker Program is voluntary. Desert Financial Federal Credit Union and its subsidiary Define Mortgage Solutions LLC do not receive any benefit, monetary or otherwise, from the Participating Broker under this program. Participating Brokers are non-affiliated third parties of Define Mortgage Solutions LLC and Define Mortgage Solutions LLC makes no warranties or representations about the services provided by Participating Brokers. To participate in this program, the member does not have to finance mortgage loan through Define Mortgage Solutions LLC. For full program details, see the Real Estate Broker Program Member Notice Acknowledgement.
Mortgage loans are offered by Define Mortgage Solutions, LLC, NMLS ID #1761612, a subsidiary of Desert Financial Federal Credit Union. BK#0949053
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