First-Time Homebuyer Finance 101
Buying a home is a big step, and it's important to be informed about the financial aspects of the process. In this blog post, we'll go over some of the basic concepts you need to know as a first-time homebuyer, including how to calculate your debt-to-income ratio, how much of a downpayment you need, and what credit score requirements you should be aware of. To determine if you’re eligible to be a first-time homebuyer, check out our FTHB Calculator on our website.
DEBT TO INCOME RATIO
First, let's talk about your debt-to-income ratio. This is a key factor that mortgage lenders will consider when evaluating your loan application. Your debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly income.
To calculate your debt-to-income ratio, you'll need to gather information about all of your monthly debt payments, including your mortgage, car loan, student loans, credit card payments, and any other debts you may have. You'll also need to know your gross monthly income, which is the amount you earn before taxes and other deductions are taken out.
Once you have this information, you can use the following formula to calculate your debt-to-income ratio:
Debt-to-income ratio = Total monthly debt payments / Gross monthly income
For example, if your total monthly debt payments are $1,500 and your gross monthly income is $5,000, your debt-to-income ratio would be 30% ($1,500 / $5,000 = 0.3).
DOWNPAYMENT
Next, let's talk about downpayments. The downpayment is the amount of money you need to put down upfront when you buy a home. The size of your downpayment will depend on the type of mortgage you get and the price of the home you're buying.
For most conventional mortgages, you'll need to put down at least 5% of the purchase price of the home. For example, if you're buying a home for $200,000, you'll need to put down at least $10,000 as a downpayment.
If you're unable to make a downpayment that large, you may qualify for the South Dakota Housing First-Time Homebuyer Program, which offers low interest fixed rate mortgage loans and cash assistance for homebuyers purchasing their first home.
South Dakota Housing also offers downpayment assistance for those looking for closing cost assistance through our Fixed Rate Plus loan. If you qualify, you may receive 3% or 5% in downpayment and closing costs assistance to help with financing your mortgage.
CREDIT SCORE
Finally, let's talk about credit scores. Your credit score is a key factor that mortgage lenders consider when evaluating your loan application. A higher credit score can make it easier to qualify for a mortgage and may help you get a lower interest rate on your loan.
Most mortgage lenders prefer to work with borrowers who have credit scores of at least 620. However, if you have a lower credit score, you may still be able to qualify for a mortgage, although you may need to put down a larger downpayment or pay a higher interest rate.
To improve your credit score before you apply for a mortgage, you should:
Pay all of your bills on time
Pay off as much of your existing debt as possible
Avoid applying for new credit cards or loans
Correct any errors on your credit report
There are several ways to improve your credit score. One of the most important is to make sure you pay all of your bills on time. Late payments can negatively affect your credit score. Another way to improve your credit score is to pay off any outstanding debts you may have. The less debt you have, the better your credit score will be.
Additionally, it is important to not apply for too many credit cards or loans at once, as each application can have a negative impact on your credit score. You can also consider asking for a credit limit increase on existing credit cards, which can help your credit utilization ratio. Finally, monitoring your credit report regularly can help you catch any errors that may be affecting your score. By following these tips, you can help improve your credit score and increase your chances of getting approved for a mortgage.
Buying a new home is a big step and it's important to be well-informed before making such a significant investment. From understanding your credit score and budget, to researching neighborhoods and getting pre-approved for a mortgage, there are many things that new home buyers need to know. By taking the time to educate yourself and plan accordingly, you can ensure that the process of buying your new home goes as smoothly as possible. Remember to work with professionals such as a mortgage lender, they can help you make smart and informed decisions throughout the process. Buying a new home is a big step, but by being prepared, you can make it a successful and exciting experience!
