So You Want to Buy Your First Home

This is for potential home buyers that plan to use a mortgage (home loan) to buy a house (or condo, I’ll keep it simple and use “house” here). Please remember that there are many home loan products out there and use this as an outline only as I’m not a licensed home loan professional. It’s just that I see these types of loans offer a good blend between affordability (relatively low rates in the market place) and stepping tone for you to become a home owner.

1. Conventional loan (5% down, AKA 95% to 97% loan to value “LTV”). This is often the best option if you have good credit history and credit score (at least 620). For simplicity, I see and hear that if you have a credit score of 740, you get the best interest rate. You get to borrow up to 95% to 97% of the value of the home to be purchased once you’re approved as a borrower, and the home had been appraised. More information on conventional loan. Conventional Loan Requirements for 2021 – NerdWallet
2. FHA loan (3.5% down, AKA 96.5% LTV). This is a great option for many people when their credit history had a dent in the past but have been working towards fixing it. The minimum credit score needs to be 580. If your credit score is less than that, you’d have to put more down. More information on FHA loan. FHA Loan Requirements in 2023
3. USDA loan (0% down, AKA 100% LTV). This is a great option if you’re looking to purchase at outer edge of metropolitan areas. There is no credit score requirement to use this loan but there are other eligibility requirements such as home locations and income. More information on USDA loan. Single Family Housing Guaranteed Loan Program | Rural Development (usda.gov)

All of these loan programs will need you to show your past 2 years of tax return (income history), your employment history, your debt history, and past 2 months of bank statements showing your have the amount of cash needed for down payment and closing costs. There are other requirements for each type of the loans such as borrowing limit based on the county, as well as based on your income. Regarding your income, there are specific calculations need to be done to make sure you’re not taking on too much debt, commonly known as debt to income (DTI) ratio. If you want to try to calculate this yourself before approaching a loan originator, here is a simple version of how.

Pretend you make $6000 a month, and you have student loans payment $250 a month and no other debt, and a home you’re interested in will have a payment of $3000 a month, your DTI = ($3000+$250)/$6000 = 0.54. The loan programs above generally want your DTI to be less than 0.42, so 0.54 is too high, no good. What if instead you want a different home with a payment of $2000 a month? Then your DTI = ($2000+$250)/$6000 = 0.375, which is less than 0.42, hurray, you passed the first check, but this doesn’t mean you’ll be approved for a home loan yet. It just means that now it’s worth your time to approach a loan originators to find out what you can actually afford. One important thing to note, the payment per month number I used above includes principal, interest, taxes and insurance (PITI). When you use a mortgage calculator to figure out the monthly payment, don’t forget to estimate property tax (I usually use 1.25%) and homeowner’s insurance (I use $100 to $200 a month). Here is my favorite mortgage calculator. Mortgage Calculator

I’m excited that you’re reading this to prepare for homeownership and I have so much more to share!