Over the last few weeks, one of the most common questions we receive from our readers has been: What things are needed to buy a house?
The answer to this question has changed over the last couple of years, partly because the mortgage industry has eased. So we thought it was high time for an updated look at this question. Here are some of the things that might be needed when buying a home with a mortgage loan.
3 Things Needed to Buy a House (With a Mortgage)
Note: This article assumes that you are using a mortgage loan to finance your purchase. Buyers who pay cash for a house have fewer requirements than those who use loans. But since most people use financing when buying a home, that is the audience we will address.
Here are three things you might need to qualify for a mortgage and buy a home.
1. A decent credit score, ideally 600 or higher.
You don’t necessarily need perfect credit to qualify for a home loan these days. In fact, the average credit score among close loans has dropped a bit over the last few years. That’s because lenders are relaxing some of their qualification criteria.
So, what credit score is needed to buy a home?
While the rules aren’t written in stone, a score of 600 or higher will generally put you in a good position to qualify for a home loan and buy a house. Having a 640 or higher would be even better. Some lenders might set the bar higher than that, while others will allow for a slightly lower score. It can vary, which is one of the reasons you should shop around.
The FHA program is one of the most “forgiving” mortgage options, when it comes to the credit score needed to qualify. The minimum score required by HUD is 500, but borrowers will need a 580 or higher to qualify for the 3.5% down payment option.
2. A down payment of some kind, at least for most loan programs.
Are you a military member or veteran? If so, you might qualify for the VA mortgage loan program, which offers 100% financing. A down payment is not needed when buying a home through the VA loan program. The same goes for the USDA program, which offers financing for select home buyers in rural areas.
For everyone else, a down payment is usually required.
The size of the down payment that is needed to buy a house can vary from one mortgage program to the next. Conventional loans allow borrowers to make an investment as low as 3% in some cases (a trend that started a couple of years ago). The FHA program requires 3.5% down. And we’ve already talked about the VA mortgage option, which allows for 100% financing to eligible borrowers.
3. A debt-to-income ratio no higher than 50%, in most cases.
Banks and mortgage lenders use the debt-to-income (DTI) ratio to ensure that a person is not taking on too much debt, with the addition of a mortgage loan. This is simply a percentage that shows how much of a person’s monthly income goes toward recurring debts.
For example, a person with a “back-end” DTI ratio of 40% uses 40% of his or her income to cover monthly recurring debts.
Which begs the question: what debt-to-income level is needed to buy a house? While the requirements can vary from one mortgage program to the next, most lenders will set the bar somewhere around 43% to 50%. So, if taking on a home loan will push your total DTI above 50%, it might raise a red flag.
But again, these are just general guidelines used by most mortgage lenders most of the time. Exceptions are often made for otherwise well-qualified borrowers, particularly those with compensating factors that offset a relatively high debt level.
Bonus Points for Being Open-Minded and Flexible
Limited inventory was the big housing news story of this past year. In many real estate markets across the country, there just aren’t enough homes for sale to satisfy buyer demand.
That’s one of the reasons why home prices have risen so steadily over the last few years, particularly in the more constrained markets like California and the Pacific Northwest.
If you live in a city with limited housing inventory (and there’s a good chance of that), you’ll need to be flexible and open-minded about buying a home.
This is not a mortgage requirement, obviously, but more of a personal character trait that will benefit you during your housing search. Chances are, you will have to make compromises at some point during your house hunting process. You might have to expand your search area, scale back on your price range, or give up some of those desired features on your wish list. That’s the reality of the market.
Disclaimer: This article gives a basic overview of what is needed to buy a house. It is not all-inclusive. We have covered what we feel are some of the most important requirements for home buyers who need to use mortgage loans to finance their purchases. Depending on the type of loan you use and other factors, you might encounter additional requirements that are not mentioned above.