What’s a first time home buyer to do?

There are several things to consider when you are preparing to buy a home for the first time. Perhaps the most important of these are:

We’ll take a look at the list in greater detail to see what implications they have for you.

Your credit score

In order to get a loan for your first home your credit score should at least be 600. Lenders look at your score on all three credit bureaus and use your middle score as the qualifying number. If you are a veteran and thinking of access in the Veterans Administration loan program your credit score should be at least 640. The reason for the difference is that VA loans allow you to put no money down so because you don't have a down payment or don’t need to use a down payment, you're a slightly higher credit risk. So the VA wants to see that your credit score is a little higher than our base lending scores.

Open lines of credit

Apart from your credit score it is important that you have at least two open lines of credit and open lines of credit can be: secured or unsecured credit cards, store cards or car notes. You may ask what's the significance of having open lines of credit? Well, active open lines of credit prove to the lender that you are used to paying bills on time and paying regularly. The thinking is, if you can handle credit card payments and things of that nature, you should be able to handle paying a mortgage regularly and on time.

Other things to consider

Past credit problems such as bankruptcy, short sales and foreclosures can exclude you from qualifying for a mortgage for varied periods of time. It’s a good idea to check with a licensed loan officer well in advance of your purchase decision to ensure you have reached the qualifying period after any of these unfortunate events.

What’s a debt to income ratio?

Another important consideration in qualifying for a home loan is your debt to income ratio. Many first-time home buyers may have adequate income for paying the mortgage and mortgage payment can often times be sometimes a little less than what you are paying for rent. But if a lender sees that your ratio of outstanding debt obligations like your minimum required credit card payments, your auto and other regular loan payment that you make are above a certain limit, you will be regarded as too risky for a mortgage. One good rule of thumb is to try to avoid buying a car before you buy your home.

Adding another borrower

If you feel you may not be able to qualify for a mortgage payment you can add someone else to your loan but they also have to meet the same qualifications that you do. Your combined debt to income ratio must fall in line with the lender requirement. If both parties meet the basic minimum qualifications, your next step then is to contact your lender and start the process of a closer look at your mortgage qualification situation.

Proof of income

Income is not restricted to a regular paying job. You can use pensions, retirement income and investment income as part of your qualification. But your source of income must be provable and regular. Self-employed persons have stricter demands on proving their income and the rule of thumb here is, if it didn’t show up on your two most recent income tax filings, it doesn’t exist.

What kind of down payment?

Unless you are applying for a VA loan or a USDA loan (both may require some kind of funding fee), you will need a down payment. Many first time buyers use funds from their 401k as a down payment source. Other sources include personal savings and even gift funds from a close relative. It’s always a good idea to start placing your down payment savings in a separate checking or savings account so that your lender can readily verify the source of funds as per homeland security regulations.