Question No. 1: I’m not sure if this is a real estate question. I am on disability with an income of $1,327 per month. I have a $444 car payment and a credit score of 630. I have $24,000 in savings. Do you think I could ever own a home with this income and credit score? –Scott
Question No. 2: I filed bankruptcy and it was released in December 2010. I found a house for $38,000. I have 29 years on my job, but my credit score is only 600. I have a small down payment. I am a first-time homebuyer and a single female. Is there any hope for me to get a loan in the next 30 days, before this house is gone? I am 57 and would like greatly to fulfill my dream of homeownership. –Jo
Question No. 3: I have a client who did a short sale on his house, then filed bankruptcy a year later. He has rebuilt his credit to a 686 FICO score, and would like to buy a house. The bankruptcy will be two years ago in October 2011. Can you help me to find financing for him? –Jennie
A: As you can see, one of the most frequently asked questions I receive is some variation on a highly personalized fact scenario. And these three are just a sliver of the scenarios that hit my email inbox "on the regular," as my kid would say. When I close my eyes at night, I don’t dream of sheep or sugarplums; instead, I see FICO-score/income/down payment combinations. No joke.
Though it would be humanly impossible for me to answer every one of these "Will I ever be able to own a home?" questions, I would like to get you — all of you, even those who are emailing your scenario this very moment — closer to an answer.
To that end, allow me to help you resolve any question you have about how feasible homebuying and/or obtaining a mortgage is for you: Call a mortgage broker! A mortgage broker can usually spend about five minutes getting answers to your questions, and give you a basic assessment of your prospects for qualifying. (Obviously, more detailed conversations and documentation will follow.)
Figuring out whether you qualify for a home loan, how much house you qualify to buy, and if not, what steps you need to take to get qualified is not a do-it-yourself deal, people. It’s also not that simple; there is a lot of information on these topics online, and I’m happy to give you some more specifics, but mortgage guidelines change frequently. Sometimes daily.
I’d hate to see someone never own a home or waste good years floundering about doing nothing or doing the wrong thing to prep for buying, simply because of questions that were never asked. I’m happy to help, but there are many state, county and local programs that offer down payment and mortgage assistance to those who need it the most.
As brilliant as I am, I don’t have all of these programs listed out in my mental spreadsheet. But local real estate brokers and agents and mortgage pros do. Don’t hesitate to contact them for help figuring out what’s available to you, or help putting an action plan in place if you can’t qualify to buy right now.
Whew. I needed to get that out. OK.
Now, let’s move on to some general rules of thumb that you can use for a very basic understanding of the bare minimums required to buy a home right this moment, with the caveat that these (a) are not absolutes (exceptions can be found where someone may not qualify with these minimums because of some other factor or may qualify despite meeting these minimums, because of some other factor); and (b) change all the time.
Additionally, these are not necessarily the ideal-case scenarios, nor are they the qualifications that will get you the best interest rates. Again, check with a mortgage pro to see what it will take to optimize your financials and get the best loan.
Here are the bare-minimum lending guidelines on today’s market, which would qualify the average borrower for an FHA loan — these loans, backed by the Federal Housing Administration, offer the loosest lending guidelines around:
- 3.5 percent down payment, based on the purchase price of the home (e.g., $7,000 on a $200,000 home), or a gift of that same amount;
- 3 percent to 6 percent of the purchase price, on top of the down payment, for closing costs, or a credit from the seller of the same amount; and
- 640 FICO credit score — the middle score of those generated by the three credit bureaus (some banks will lend to borrowers with middle scores lower than 640, but will require more than the minimum down payment).
Additionally, these lenders will want you to document income, asset and job history documentation, including current paycheck stubs, two months’ bank statements and two years of W-2 forms or tax returns, and:
- a minimum of two years have passed since the discharge of a bankruptcy;
- a minimum of three years have passed since a foreclosure;
- anywhere from zero to three years have passed since a short sale, depending on the circumstances surrounding the short sale.
Time for a few more caveats: Meeting these minimums doesn’t necessarily mean you’re in the best of financial shape, or that buying a home is a good decision for you. That’s a completely different subject, but an especially important one for those who are scraping up every penny to qualify, or who have experienced a recent financial trauma (e.g., job loss, foreclosure or bankruptcy).
If you fall into any of these categories, make sure you’ve fully financially recovered from your economic crisis and that you have a cash cushion in place before you buy — even though your lender may not require it.