|October 11, 2016||No Comments|
You’re fresh out of college and you want to buy your first home. But how? That’s what my Millennial Daughter, Rachel wants to know.
To get some answers, I sat down with one of our preferred lenders Jenni Sherman from Summit funding.
Unless you have a rich uncle and can pay cash, it takes at least 4 things to get into that first home:
You’ve must have at least a fair credit score in order to finance the purchase of a home. One loan I like a lot and will talk about more is an FHA loan.
Your FICO score must be at least 620 to qualify for an FHA loan. A higher score is better. FHA isn’t really a score-dependent loan, but if you’re score is over 700 you may qualify for a slightly better rate.
Conventional loans require high scores for the best rates.
If you’re young, you may not have much of a credit score. Unfortunately, to build your score you have to have credit. If you have always been super responsible and paid cash for everything, have never used credit – your score will… suck. Yes, they punish you for being smart with your money, but thats how it works. Lenders want to know that you can use credit responsibly.
So, you’ve got to get some credit. Easiest way to start is to get a credit card. Do a little research, find one with low interest that doesn’t have annual fees, and get one. Use it and pay it off every month! Don’t use it unless you have the money to pay it off. I’m not giving you license to go buy a new MacBook you can’t afford. And I love Apple.
Credit bureaus like you to have multiple TYPES of loans – a credit card is a revolving loan – meaning you can charge something, pay it off, and charge it again over and over again.
Another type of loan is an installment loan – that’s a loan with fixed payments for a set period, such as a car loan. It might be worth getting a SMALL installment loan to help bump your credit over time. Here’s a smart idea: Put a lot of money down on a modest car and finance the balance for 36-48 months. If you put a lot down, the payment will be small and the amount of debt will be small. THIS IS ALSO IMPORTANT! You’ve got to keep your debt to income ratio low – I’ll talk about that in a minute.
OK, so you’ve got a credit card that you pay off every month, and a car loan, with a small payment and a small balance. What are the main factors that determine your credit score?
Make you payments on time – this is massive. NEVER make a late payment.
Credit Card Utilization: If you have a card with a $10,000 limit and keep it maxed it, this will hurt your score. The good news is, pay that baby off and your score will take a huge leap upwards.
Don’t get sued – if you have judgements or collections filed against you, it’ll hurt your score
The length of your credit history has a moderate impact. Start now if you haven’t already so you can get some years under your belt.
Number of accounts – doesn’t matter a ton, but more accounts paid on time bumps your score.
Inquiries – The credit bureaus don’t like to see you applying for credit every five minutes. Only apply when you absolutely have to.
This is REALLY important: If you’re at that point where you’re about to buy a home DON’T APPLY FOR ANY CREDIT! If you go finance a new car with an $800 a month payment right before you apply for a home loan, that may kill your chance of getting a loan!
There’s an app I use to track my credit score. It’s not 100% accurate – since there are several credit bureaus and everyone uses different algorithms to calculate your score, but this thing is awesome – it’s called Credit Karma.
It updates your score regularly so you can see if you’re headed in the right direction. It’s free. They didn’t pay me to say this, I just like it. It looks like they make their money with credit card offers. Just get it in the app store for you iPhone and whatever that confusing place you get apps for on the android is called.
What’s your biggest obstacle to buying a home?
Down Payment & Closing Costs:
Start saving now! Obviously the more money you put down, the lower your payment will be.
But I know what everyone wants to know… whats the bare minimum you have to scrape together to get into a house?
One really good option is an FHA loan – you can get in for only 3.5% down! You also need to have closing costs – which will be about 2-3% of your loan amount. For our example, we’ll look at a home purchase of $400,000.
With that purchase you’d need a minimum $14,000 for you down payment PLUS closing costs of 2-3% – roughly $10,000 – for a total of $24,000. Your closing costs will vary depending on a number of factors. These numbers are just rough to give you and idea.
Later, I’ll tell you about a program that can GRANT you the down payment, up to 5%!
The next biggest issue?
You’ve gotta be able to afford the payment. So lets looks at our $400,000 home and see what the payment would be with a 3.5% interest rate:
For an FHA loan your debt to income ratio must be 45% or less – that means all your debts combined, including your new home loan, have to be less the 45% of your household monthly gross income. In our example, if you have no debt – because you just paid off your car and you pay off your credit cards every month – your monthly gross household income would need to be:
2557.83 / .45 = $5946/month
So stay out of debt! You won’t be able to afford as much house if you’re financing your BMW M5!
I’ve been talking about an FHA loan – its awesome because you can qualify even with only a modest credit score of 620 and it only requires 3.5% down.
But of course there’s always a catch.
First catch is: The max loan amount varies by county. for Ventura County that’s $603,750 and for LA county the max they’ll loan is $625,000.
The bigger catch: You have to pay for Mortgage Insurance. On our sample $400,000 home with 3.5% down, they would charge you about $6800 that gets rolled into your loan, plus a monthly payment of about $275/month.
Here’s some GREAT news. There are several down payment assistance programs – programs that will GRANT you the down payment. That’s a gift – doesn’t have to be paid back. Yes, really, I’m not making this up. You can use this grant with and FHA loan or other loan types.
One our lender’s favorite programs is the GSFA Platinum Program – which is a California program that will grant you up to 5% of the down payment and/or closing costs. Here’s the URL:
These are the requirements:
– Household income can’t exceed $101,545
– 45% debt to income ratio
– The maximum loan amount is $417,000
– Credit score must be at least 640
– Owner occupied
So here’s the bottom line – to get into a $400,000 home the minimum you’re gonna need is about $12,000 saved and a household income of about $6,000 per month with today’s interest rates, a credit score over 640, and minimal debt – if you qualify for the Platinum program.
Ya, fresh out of college that may will be tough for a lot of people. But plan now, and you’ll be able to do it.
Jones Home Collective
2655 First St Suite 150 Simi Valley CA 93065
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