October 24th, 2017 7:20 AM by Jackie A. Graves, President
Ninety-three percent of American adults believe that owning a
home is part of the American dream, and 81% believe that owning a home
increases financial stability, according to a recent survey Opens
a New Window.by NeighborWorks America.
Unfortunately, many Americans have misconceptions about what is necessary to be
able to purchase a home.
With that in mind, here are three things Americans think about the homebuying
process, and the truth behind each one. If you want to buy a home, but don't
think you'll be able to, you may find that some of the excuses holding you back
are just that: excuses.
to the survey, the average American believes that 17% of the purchase price is
the minimum down payment required to buy a home. Millennials have an even more
pessimistic view – they think that a 21% down payment is required.
It's true that a 20% down
payment is the mortgage industry standard, but it is by no means a minimum
requirement. A conventional mortgage can be obtained with a down payment of as little
as 3% Opens a New Window.by
creditworthy borrowers, and even lower-credit applicants can obtain an FHA mortgage Opens
a New Window.with a down payment as low as
better, Veterans and buyers of certain rural homes can potentially qualify for
no-money-down financing through the VA and USDA loan programs, respectively.
Some individual lenders offer 100% financing programs as well that anyone can
take advantage of, so it could be a good idea to visit a few banks in your area
to see what's available.
percent of all adults and 22% of millennials say that credit is an obstacle
standing in the way of becoming a homeowner. And it's true that a high credit
score certainly helps your chances of approval and can get you a lower interest
In reality, however, relatively
few potential homebuyers can't buy a house because of credit issues alone. The
median FICO credit score Opens a New Window.in the U.S. is 700, while
the minimum credit score necessary for a conventional mortgage is just 620. An
FHA loan with 3.5% down requires a FICO score of 580, and with a 10% down
payment, it's possible to get an FHA loan with a score of as little as 500.
to FICO's latest score distribution data, 70% of the population has a FICO
score of 650 or above, and 80% are above 600. Just 4.7% of the population have
a FICO score under 500.
To be clear, borderline credit combined with
other issues, such as little money in savings, unstable income, or lots of debt
can be a reason for mortgage rejection. But for most people, credit alone is
not a major obstacle.
loans are a big issue in the U.S., especially for younger Americans. More than
half of millennials have student loans, and nearly one in four millennials say
that they have delayed buying a home because of their student loan debt.
idea that student loan debt will prevent you from buying a home is true in some
respects, but recent changes to the mortgage qualification guidelines have been
implemented specifically to make it easier for student loan borrowers to buy
make a long story short, government-sponsored agencies Fannie Mae and Freddie
Mac publish standards for conventional mortgage approval. One of the main
criteria is the borrower's debt-to-income ratio, which is the borrower's total
monthly debt obligations (including the new mortgage) as a percentage of their
pre-tax income. For example, if a borrower had monthly debts of $1,000 and
income of $5,000, this would translate to a 20% debt-to-income ratio, or DTI.
recently, the maximum allowable DTI under Fannie Mae's guidelines was 45%.
However, as of July 29, 2017, this maximum has been raised to 50%, specifically
to make it easier for first-time buyers to get approved.
Now, this isn't to say that
buyers necessarily should buy a
home that results in a 50% DTI ratio. But student loan debt might be less of an
obstacle to mortgage approval than you might think.
I own my home Opens a New Window., and I generally believe
that buying a home is a smart financial move for most people. That said, it
certainly isn't for everyone, and there are some perfectly good reasons Opens a New Window.why you might be better
takeaway here is that if you want to take the leap into homeownership, don't be
so sure that your lack of a down payment, credit score, or student loan debt
will prevent you from buying a home of your own.
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