I generally go through this with every buyer I meet just to make sure that folks understand the big picture. In every lending situation, we need to talk about four things – Income, Cash, Credit, and Property.
Income must be stable and sufficient for the proposed payment on the home. By stable we mean that it is likely to continue. Two years is a comfortable amount of time for underwriters to look back and see that a person has the ability to earn income. The borrower may have changed jobs so long as the income is steady and the new employment is as stable as before and consistent with what the borrower did before. If the income is a guaranteed or settlement payment, like child support or disability income, then it must be proven that the income will continue for at least three more years.
Cash is next. Not every program requires a borrower to make a down payment – but most do. We will go into the program specifics as it pertains to down payment in the next post. For now, I just want to go through the main headings that require cash from a home buyer. These are: earnest money deposit, down payment, closing costs, prepaid items, inspections, and repairs. The earnest money deposit is simply a prepayment toward the other and is not a separate fee. Inspections and repairs are not always required – theses are negotiable or paid at the decision of the buyer. Closing costs and prepaid items (up to a maximum percentage allowed based on the loan program [3 – 6%]) are able to be negotiated into the sale price and paid by the seller.
Credit history and credit score is next. Some say that this is the most important. I think a better way to put it is that credit is the most influential. Borrowers with a lot of income and a lot of cash but have a low credit score will not like the options available to them. Dave Ramsey always makes the joke that he could walk into an apartment rental office today and be declined to rent an apartment for $600 per month, yet if he wanted to he could write a seven million dollar check and buy the entire complex – doesn’t matter, the credit score is important. A 620 score will get you into an FHA, VA, or Rural Development Loan. You need 680 or above to go conventional. If you are over 720, then you will get the best rates and more options for putting less money down. Over 740 and you may even see some slight benefits beyond the average.
Lastly we look at the property. We deal with the above first so that we can confidently send a buyer out to look for a home, but when all of that is dealt with, the house is next. Essentially the home has to be in good condition and worth what you are paying for it. We rely on the appraiser for both of these issues. These days, some homes are being sold for more than any homes around them. That makes it difficult to appraise because no comparable homes have sold for the same price. Many other homes are being sold at a discount, but are in rough condition causing appraisers to require some repairs. FHA, VA, and RD will generally be more intense about the home’s condition. While a conventional loan appraiser is looking to see if the home passes basic livability standards.
There are MANY details that I will uncover in the posts that will follow, but this is a good overview.