• Not all mortgages mandate a 20% down payment. Be sure to research eligibility requirements for FHA loans, VA loans, USDA loans, and even conventional lenders to see if you could qualify with less.
• You will need to save additional money for closing costs and future maintenance on your new home. 
• Down payment and closing cost assistance programs are sometimes available through your state, county, or city if you haven’t owned a home in the last few years or are buying for the first time.
• Your credit score and debt-to-income ratio are significant factors in qualifying for a mortgage. The sooner you sit down with a financial counselor, the sooner you can get these metrics on track.

June is National Homeownership Month, so there’s no better time to discuss the basics you need to know when purchasing a home!

You might think you need to save 20% of a home’s value to purchase a property, but that’s not always true. Government programs may allow you to qualify with a lower down payment, but you must also improve your credit score, pay off excessive debt, and save for closing costs.

Understand the Loan Types Available

In an ideal world, everyone would have at least 20% to put down for their mortgage. However, in today’s environment, that’s unrealistic. 

Luckily, a conventional mortgage isn’t your only option. These government-backed loans can get you in the door even if you don’t have that ideal 20% number: 

• FHA loans: As low as 3.5% down
• VA loans: 0% down for veterans
• USDA loans: 0% down if you’re purchasing in a rural development area

Conventional mortgages may also require a down payment lower than 20%, depending on your financial situation.

Research Down Payment Assistance Programs

Look to your state, county, and city housing authorities to see if they offer down payment assistance programs. These programs usually require you to attend a homebuyer education course and may mandate a certain income level along with a maximum mortgage amount. 

The assistance can be significant if you haven’t owned a home in the past few years. In some scenarios, you often don’t have to pay the assistance money back. Other times, it will come through as an additional loan. 

Your Savings Must Cover More Than Just the Down Payment

You’re also going to have to pay for inspections and closing costs, which can include: 

• Title insurance
• Appraisal fees
• Government taxes
• Property taxes
• Tax service provider fees
• Homeowners Insurance
• Interest due before your first payment

Depending on the type of loan, you may even have to pay mortgage insurance premiums. These can be paid upfront or as an additional charge on your monthly payments (or both). 

You’ll also want to build up some extra savings so the bank can see you have the funds to handle maintenance and repair expenses. 

Calculate Your Debt-To-Income Ratio

When you’re buying a home, lenders will pay close attention to your debt-to-income (DTI) ratio. To find this number, add up your monthly debts and divide them by your monthly income. 

Many lenders prefer a DTI ratio of under 36%. You’ll likely have difficulty finding a lender who will accept anything over 40%. If your DTI is higher than 40%, you might want to put effort into paying off your debts before trying to buy a home.

Evaluate Your Employment History

When it comes to your income, you’ll have an easier time getting a mortgage if you’ve been with your current employer for at least 12 months. That said, 24 months is even better since a more stable employment history is preferable to lenders. 

While there are ways to get a mortgage with a shorter history with your current employer, you’ll likely encounter more obstacles and paperwork. 

Check Your Credit Score

Higher credit scores will result in more favorable interest rates. Sometimes, working towards a better credit score can be the difference between securing a mortgage and not getting approved.

If you want to improve your credit score so you can buy a home, remember that Payactiv members get free financial counseling with KOFE.

Final Word

Buying a home is a big financial goal that may require years of work, especially if you’re trying to improve your credit score, pay off debt, or save for a down payment and closing costs.

Fortunately, if you know where to look for assistance and stay dedicated, this goal can lead to longer-term financial stability.All content provided on Payactiv.com/financial-learning/ is for informational purposes only. Payactiv makes no representations as to the accuracy or completeness of any information on this site or found by following any link from this site. Payactiv will not be liable for any errors or omissions in this information nor for the availability of this information. Payactiv will not be liable for any losses, injuries, or damages from the display or use of this information.