Roadblocks to Homeownership
Buying your very own home is a dream for many Americans. But buying a house can feel unattainable due to current financial circumstances. Here are common roadblocks to home ownership and what you can do to overcome them.
The four main factors to Home Ownership readiness:
Debts- Current monthly debts attributed to the borrower/co-borrower
Income –Gross annual income (all sources) for the borrower/co-borrower
Savings- Liquid assets (e.g., savings, checking accounts, gifts, assistance programs) available
Credit – Credit score pulled from a tri-merge Residential Credit Report
These are the four financial factors that a lender reviews and analyzes to qualify you for a loan. This data also determines how much to let you borrow, your interest rate, and the type of loan you will receive, among other things.
Let’s dive deeper to see how we can combat these four common roadblocks to home ownership.
When discussing debt in terms of a home purchase, remember that total debt amount is not what matters. What matters, is the borrower’s total month debt obligation. Think, “What is the minimum payment amount across my credit accounts?”
Amount Owed Min. Monthly Payment
ABC Store Credit Card $500 $25
123 Store Credit Card $150 $35
Awesome Car Loan $20,000 $450
Great School Student Loan $7,000 $100__
In the example above, the client’s total minimum monthly debt obligation is $610.
Lenders compare that amount to how much gross monthly income (GMI) you bring in. That will tell them how much to let you borrow.That is the Debt-to-Income ratio (DTI).
If your current debts total more than 10-15% of your gross monthly income look at paying down accounts with high minimums. In this example, this person should pay off the 123 Stored Credit Card ($150). That would reduce her minimum monthly payment total by $35 bringing it down to $575. If she chose to pay off the ABC Store Credit Card ($500) that would only bring down her minimum monthly payment to $585.
The amount of money you bring in each month (GMI) is proportional to how much a lender is going to let you borrow.
This can be a roadblock for you if a lender is not willing to let you borrow as much as you were hoping to due to your income. A way to estimate your affordability is by multiplying your gross annual income by 2.5 and then by 3. These two numbers give a good range of how much house you can buy.
Example: Gross Annual Income: $60,000
$60,000 x 2.5= $150,000
$60,000 x 3= $180,000
Your affordability range would be between $150,000 and $180,000 if you bring in $60,000 in gross annual income. If you are hoping to buy more house than what your range shows, you would have to make up the difference with:
- a larger down payment,
- down payment assistance funds,
- seller credits,
- or credits from your lender.
How much money you have saved will help you determine how much house you can buy. In most cases you will need to pay a down payment as well as pay out of pocket closing costs.
For most home purchase transactions, it is good to estimate at least 3.5% in down payment and 5% in closing costs.
$150,000 House Price would need at least $12,750 in cash on average
3.5% Down Payment $5,250
5% Closing Costs $7,500
If lack of savings is a roadblock for you, it would benefit you to consider the following options:
- Down Payment Assistance Programs
Various city, state, county and private programs can provide up to $30,000 in Down Payment Assistance
- Seller Credits
Many sellers are willing to provide money towards your closing costs. Discuss this option with your realtor, as they will need to negotiate this on your behalf.
- Match Savings Programs
A few non-profits have programs where they will match dollar for dollar any money you save towards the purchase of a house. Ask your housing counselor for referrals to these programs.
- Lender Credits
Many lenders will provide credits for first time buyers, purchasing in a certain part of town, or for taking the First Time Homebuyer’s Class. Ask your loan officer what kind of credits they offer.
Credit Scores determine what interest rate you receive, the type of loan type you can get, and the down payment you must bring to the transaction.
Common Credit Score Thresholds
580- Minimum FHA Credit Score
640-720- Minimum Conventional Credit Score (depending on lender programs)
If your credit is less than 580, some lenders may still qualify you for a mortgage, but you will most likely receive a much higher interest rate.
Instead of taking the higher interest rate, you can work on improving your credit score by:
- Decreasing your debts to 30% or less of your credit limit
- Paying all accounts on time
- Requesting your free credit report at annualcreditreport.com to verify the information on your credit report is valid. Be sure to dispute any accounts that display incorrect or outdated information
Roadblocks to home ownership do not have to end your journey to buying your first home. You may need some time to prepare your finances to qualify for the loan that is best for you.
If you have questions and have not yet taken a HUD Certified First- Time Homebuyer Class, call us at 713-864-9099, or sign up here: https://www.avenuecdc.org/homeownership/buying-a-home