We’ve heard it again and again — people who have paid rent for years suddenly realizing that they might be able to buy a house and make mortgage payments that are smaller than their monthly rent. It’s quite a realization, the idea that you can actually afford to own a home — if only a financing company would work with you!
There are a lot of myths going around about how difficult it is to finance a home purchase. For example, there’s the common assumption that all home loans require 20% down.
So we want to take the time to dispel some of the common misconceptions about barriers to homeownership, beginning with the 20% down myth.
The Myth of the 20% Barrier to Entry
The 20% rule has become somewhat of a tradition. Parents tell it to their children and teachers tell it to their students. It is the product of a time when the average working person could sustain an entire family on a single income. The idea is that a person should obtain the lowest possible monthly mortgage payments, and a good way to do that is to save up to make the biggest down payment possible.
In today’s economy, you will find that the 20% down payment barrier is not a hard rule for conventional home loans. Non-conventional FHA, VA, USDA, and jumbo loans are much more flexible too. In some instances, we’ve heard of FHA loans going for down payments as low as 3%.
Entering the Homebuyer’s Market
The key to getting into the home buyer’s market as a person of modest means is getting pre-qualified. Getting pre-qualified is also the best way to find out how much house you can afford.
To get pre-qualified, you need a few things. They are:
- Proof of income: You’ll need W-2 statements going back two or more years, recent pay stubs, and documentation of any other income such as alimony.
- Proof of assets: Bank statements that show you have enough money to make a down payment will be required.
- Good credit: Most lenders require a credit score of 620 or better.
- Employment verification
- Other documents: You’ll also need basics like a copy of your driver’s license and Social Security number.
Whipping Your Finances and Credit into Shape (For a Loan Application)
While we would like to bring you nothing but sunshine and rainbows as you look into buying your first home, the truth is you have some work ahead of you. But not to worry, it won’t take long.
If your credit is below a 600 the first thing you want to do is get your credit into shape. As you know, having no credit can be worse than having bad credit — but it can also be fixed more quickly. In many instances, getting a single credit card and using it responsibly for one year can take you from an unacceptable risk to an attractive borrower.
We know you’re raring to go and buy your first home, but if your credit needs help, taking a year to fix it up is your best move. What’s more, you’ll have more time to save up for the down payment.
Once you’ve got that squared away, it’s time to start getting ready for your mortgage pre-qualification application. Brace yourself, because this is the fun part.
How to Set a Budget for Your First Home?
An important part of qualifying for any kind of loan isn’t just about having the means to pay it off. It’s about presenting yourself as responsible and showing your prospective lender that you have a viable plan to make regular payments.
To begin, we’ve already established that if you’re a renter, you can probably afford a mortgage payment. What you need to do is hammer out a conservative budget and then come up with some projections on what you can afford.
- Monthly income: Figure out how much you take home after expenses (all expenses).
- Available funds: After figuring out your income, try reducing expenses by eliminating as much excessive spending as possible (be realistic).
- Debt: Figure out how much your current debt will cost to pay off if you weren’t missing any monthly payments. If you’re heavily in debt, that can be a major impediment to moving forward. Before applying for a loan, you may need to look into a service that can help with the consolidation of debts.
- Check your credit: You don’t want to check your credit every day, but knowing what it is before your lender checks it will help eliminate surprises.
Now That You’ve Done Your Homework
Finally, you’re ready to apply. Reach out to one of our home loan professionals here at Southwest Funding by filling out the form on this page, or if you’re working with one and need to apply, click here or “Apply Now” up top. We’ll get right into discussing mortgage interest rates and whether a fixed rate or an adjustable rate mortgage is right for you.
We’ve been in the business of providing high-quality home loans to first-time buyers like you — serving southern and mid-western states for a quarter of a century. We offer conventional loans as well as low down payment loans like VA, FHA, USDA, Jumbo loans, and more.
Call or apply online for your first home loan today.
Southwest Funding, Limited Partnership (NMLS #32139) is an equal housing lender. Loan product availability is subject to many factors including loan amount and qualification of borrower. Not every applicant qualifies or is eligible for every loan program. Rate and annual percentage rate (APR) calculated on a 360-day year with typical/normal closing costs. Rates and annual percentage rate (“APR”) are dependent on factors including, but not limited to: loan program selected, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms, and interest rates are subject to change without notice.