Sure, you'll buy a house. Just as soon as the money truck dumps a big load of cash at your front door. And the credit fairy sprinkles a whole bunch of that magic dust on some numbers that aren't even close to "qualifying" levels.
That's a common response to the idea of buying a home. The desire is there, but perhaps not the ability.
Or so you think.
"Many people have no idea they can buy a home so they don't even consider it," said Kevin Pierce, a leading mortgage loan originator with HomeBridge Financial Services. Perhaps they don't have a down payment or their credit isn't perfect. But the truth is that with a little time, work, and patience, homeownership can be a reality, not a fantasy. You just need the right people in your corner."
Pierce recounts a story about a client who went from "unqualified applicant who was desperate to buy" to "homeowner" in six months. "He really wanted it, and she worked hard to save while we worked together to improve her credit," he said. "Now he has a home of her own whereas before she just had a dream."
Down payment assistance
Well that's nice, you say. But what about the down payment?
That big chunk of cash is what stands in the way for many people. But available programs on the city, state, and federal level can help.
"If you qualify for a conventional loan (the least-expensive type, which conforms to tougher rules written by giant mortgage companies Fannie Mae or Freddie Mac) you'll need a down payment of at least 5 percent," said CNN Money.
For a Federal Housing Administration (FHA) loan, the most common loan type for first-time homebuyers, the minimum down payment is 3.5 percent. "However, a number of nonprofits can help middle-income buyers with down payments," said CNN Money. "Some buyers are able to get a home with no down payment at all."
California's CalHFA program "offers a variety of loan programs to help" people purchase their first home, with income requirements that vary per county. In L.A. County, for instance, the income limit for a single individual to qualify for CA state assistance under the program is $52,150. For a family of four, that number is $74,500. For more information about California programs, visit CalHFA.
The U.S. Department of Housing and Urban Development's (HUD) website has a state-by-state list of programs.
Individual cities, like Plano, TX, have financial assistance programs for low to moderate-income buyers buying within that city. Financial assistance is "in the form of non-repayable grants." For more information, click here.
There are also federal programs like the Federal Home Loan Banks' Affordable Housing Program (AHP), "one of the largest private sources of grant funds for affordable housing in the United States." See FHL Banks for more information.
A knowledgeable lender will be able to tell you how much you need to come up with for your down payment and recommend any available grants or assistance programs to help offset the costs.
So now that you've figured out how to get your down payment taken care of, it's time to think about closing costs. Closing costs can be one of those unexpected expenses that sneak up and bite you if you are not prepared. They range between two and seven percent of your loan amount - but before you freak out and decide you're definitely not homebuyer material, there are ways to get help here too.
- Assistance programs that offer down payment funds often allow funds to be used to pay closing costs.
- Depending on the strength of the real estate market in the area in which you are buying, the seller may kick in closing cost assistance.
- A good lender may be able to figure out an equation within your particular loan parameters to offset closing costs through a credit.
"The saying is 'buyer beware,' but with first-time buyers, a lot of the time it's more like 'lender be aware," said Pierce. "If you are working with a lender who is isn't knowledgeable about different assistance programs that can help you purchase a home, or is unwilling to help you find out, perhaps it's time to move on to a new lender."
Now comes the hard part for many people, because credit worthiness is often the one area where getting from A to B might be out of their hands.
MSN recommends addressing any credit problems a full year before applying for a mortgage, ordering your credit report, dealing with debt, and working on any credit scores that won't meet qualification minimums; for an FHA loan, don't expect to qualify with anything lower than a median score of 620 on the three credit reports (Experian, Equifax, and TransUnion). The higher the median score, the more likely it is you will qualify without extra effort and the better your interest rate can be.
If your scores are low, it's time to go on the offensive. And, unfortunately, repairing your credit isn't as straightforward as it should be, whether the issue is errors on your report or boo-boos you need to make right.
"The world of credit repair is complicated and frustrating and often makes no sense whatsoever," said Pierce. "It's not for the faint of heart, and it's probably not for buyers to take on by themselves unless they have endless time, patience, and knowledge of how the system works. Buyers really want to make sure they are working with a lender who has experience in this area and who can guide them in the right direction."
Success stories are out there - just ask the desperate homebuyer who raised his score by 145 points in six months. And so are happy homebuyers, even those who one day thought they'd be renting forever and the next were on their way to the American dream.