Before you purchase your first home, you need to figure out how much of a mortgage payment you can afford. Your housing costs should be between 28 and 30 percent of your income, according to Bankrate.com. To buy a home you need adequate income, an acceptable credit score, a down payment and a mortgage approval. Requirements vary depending on the type of loan. The most common mortgages available are conventional, FHA and VA loans. The Federal Housing Administration insures FHA loans, while the U.S. Department of Veterans Affairs backs VA loans available to military personnel, spouses, veterans and certain family members.
The Internal Revenue Service (IRS) and the U.S. Department of Housing and Urban Development use the idea of "principal residence" to qualify someone as a first-time home buyer. Under the government's definition, you are a first-time home buyer if you have not owned a principal residence within three years of purchasing your home. A principal residence is a home that you live in during a majority of the year. According to Bankrate.com, IRS rules state that you may borrow up to $10,000 from an Individual Retirement Account for a down payment if you're a first-time home buyer.
Debt to Income Ratio
Your debt-to-income ratio is the percentage of income you spend each month on debt payments. If your monthly income is $3,000 and your debt payments (including credit cards and student loans) are $1000, your debt-to-income ratio is 33 percent. Conventional loan requirements use the guideline of 36 percent or less for the debt-to-income ratio. The maximum debt-to-income ratio for an FHA loan is 43 percent. Under VA loan requirements, the standard debt-to-income ratio is 41 percent. The maximum ratio includes current debt payments in addition to your projected mortgage payment.
You need to submit copies of your W-2 forms when applying for a conventional, FHA, or VA loan. Mortgage approval guidelines require you to submit proof of income for the past two years. If you're self-employed, copies of your tax returns for the past two years substitute for W-2 forms. To verify current employment or self-employment income , you need to provide copies of your pay stubs or an income statement and balance sheet for your business. You also need copies of bank statements for any savings and investment accounts.
Conventional loans use Fannie Mae and Freddie Mac credit score guidelines. Fannie Mae and Freddie Mac are government-sponsored agencies that purchase loans from mortgage lenders and help establish underwriting guidelines. Conventional loan requirements prefer a credit score of 740 or higher, according to Bankrate.com. The lowest acceptable score is 620. FHA guidelines include a history of steady, on-time payments, no foreclosures within the past three years, and no Chapter 7 bankruptcies within the past two years. The FHA requires credit scores of 580 or above to provide maximum funding; credit scores below 500 are not allowed. VA loan guidelines state that you may meet credit requirements if you have not had any bankruptcies within the past two years. The VA does not require certain credit scores, but banks that deal with VA loans are allowed to set their own credit score requirements, and often set the minimum at 620.
- Wells Fargo: Buy Your First Home
- FHA.com: FHA Requirements Credit Guidelines
- United States Department of Veterans Affairs: Pre-Loan Frequently Asked Questions
- Hud.gov: First-Time Homebuyers
- Bankrate.com: IRS Rules for Early IRA Withdrawals
- Bankrate.com: 12 Must-Dos for the First-Time Home Buyer
- Bankrate.com: Conventional, VA, FHA Mortgage
- Direct VA Loans: VA Home Loan Guide
- FHA Requirements: Debt Ratios
- The Mortgage Professor: What Do Fannie Mae and Freddie Mac Do?
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