https://www.hud.gov/states/texas/homeownership/buyingprgms
Before you attempt to buy a house…
Unless you are sitting on a bag of money large enough to purchase a house for cash, you should become pre-approved for a home mortgage loan. If you skip that step, home sellers will not take your offers seriously.
Before you become pre-approved – which is exactly like making an application for that loan – you need to consider three things:
- Your credit score – because it will affect everything
- How much down payment you’ll need
- Your debt-to-income ratio
Since your credit score affects everything, let’s start there.
The higher your score, the better your odds of qualifying for favorable loan terms.
While many credit scoring models exist for different purposes, most lenders will use your FICO score. A perfect FICO score is 850, but few people are perfect. Here’s how scores are rated:
- 760 and above: excellent
- 700 – 759: good
- 650 – 699: fair
- Below 650: poor.
- 580-649: you’ll only qualify for a FHA loan or possibly a VA loan.
- 579 and less: Get busy improving your credit before you try to buy a home.
Before visiting a lender, go to annualcreditreport.com and request a copy of your credit report. You’re entitled to one free report every year, and you should take advantage of that. Even if you aren’t planning to borrow money, checking your report will allow you to catch mistakes that could cause trouble later. That means do read each entry and make sure it is accurate.
If you’re planning to purchase a home, do pay the extra fee to get your FICO score. Then, if you need to raise the score, begin taking those steps.
How much down payment will you need?
You’ve no doubt heard/seen the figure 20% named as the gold standard. It rates that nickname for two reasons:
You’ll get the best rate and terms if you put down 20% or more.
If you put down 20% you will not be subject to private mortgage insurance, which can add several hundred dollars per month to your house payment.
Many lenders offer programs with down payment requirements ranging from 5% to 15%, and FHA loans require only 3 ½% down. Veterans can get VA loans with zero down and no private mortgage insurance. USDA loans are available with the same zero down terms.
Will you ever need MORE than 20% down?
Yes, if you want a jumbo loan (a loan above the limits for government sponsored loans) your down payment may need to be as much as 30%
Right now the limit for government-sponsored loans in most communities is $726,200. In areas with an extremely high cost of living (such as Manhattan and San Francisco) the threshold is $1,089,300.
The more you can put down, the better, so seek help if you qualify.
This USDA website https://www.hud.gov/states/texas/homeownership/buyingprgms offers information on down payment assistance programs in Texas.
What is your DTI ratio?
First, what is a DTI ratio? DTI stands for debt-to-income and it is the ratio of how much you earn to how much you are obligated to pay out each month.
It encompasses all of your debts, such as a car loan, credit card balances, school loans, etc.
If you earned $6,000 per month and paid out $1,000 in debts, your DTI would be 16.6% (1,000 divided by 6,000). In general, lenders want to see your DTI ratio to be 36% or less after figuring in your new monthly mortgage payment.
So if your new payment would be $1,000 they would add that to the $1,000 you’re paying in other debts and calculate DTI by dividing 2,000 by 6,000. Your new DTI would be 33.3%. Some lenders will allow a DTI of up to 43%, but if you plan ahead to keep your DTI ratio under 36% you’ll always be safe.
