Q: My fiancé and I want to buy a condo for $160,000. I am 20 and he is 21. We both have credit scores that are about 700. I work full-time at a bank. He is a full-time student and works part-time. He will be graduating in one year and we are getting married this summer. Do you think that we will be able to get a mortgage with a $7,500 down payment?
A: Unfortunately, the market has changed. Unless your bank is willing to give you a loan based on your verifiable income, credit history and score, you may not be able to qualify for the mortgage.
For the most part, your best loan option might be an FHA loan because of the size of down payment you want to put into the purchase. As for most other loan products, you may find it difficult to secure a low down payment loan.
FHA loans require just 3.5 percent in cash for a down payment. (Conventional lenders will require a higher down payment and expect to put down even more if you’re buying a condominium). On a $160,000 home purchase, you’d have to put down at least $5,600, but you’d have to be able to afford the payments. On a 30-year fixed rate mortgage at 5 percent, your monthly payments would be about $840 plus real estate taxes and insurance.
You also need to keep in mind that recent loan guidelines may make obtaining a loan for the purchase of a condominium more expensive. In some cases, interest rates on loans for condominiums can be up to one half percent higher than non-condominium loans. And, you may need to put down a higher cash down payment.
Your mortgage, taxes and insurance cannot exceed 36 percent of your gross monthly income. So if you assume your real estate taxes are $3,600, or $300 per month, and your homeowners insurance is $1,800, or $150 per month, your total monthly expenses would be about $1,290.
If you’re buying a condominium, you have to factor condo association (or homeowners’ association) fees into the mix. Those, along with your mortgage, real estate taxes, and homeowners’ insurance premiums have to fall below 36 percent of your gross monthly income with very few exceptions.
While 700 is a good credit score, it’s not a great credit score. Some lenders are now looking for borrowers to have at least a 720 credit score to get the best rates.
You should check your credit history by obtaining a free copy at www.annualfreecreditreport.com to make sure your credit history is accurate. (If you choose to buy your credit score at that point, it will cost you around $8. Choose the Equifax score which is closely aligned with your FICO score, which most mortgage lenders use.) Then you should try to determine where you are losing points on your credit score. Do you have too much debt? Have you paid any bills late? Do you have too many credit cards with high debt limits? Or is it that you and your fiancé are young and haven’t had time to let your credit history season?
While you and your fiancé have saved a significant amount of money, it may make sense to wait until he is done with school or has at least secured a job. Waiting another year to buy will give you time to raise your credit score and save even more money. Once your fiancé gets a job, and the two of you get past the wedding, you may find you have a clearer idea of where you want to live for the next 5 to 7 years, or longer.
If you decide to pursue buying property now, speak with a mortgage lender to see what options you may have. You may be pleasantly surprised to find that you and your fiancé will qualify for a nice starter home. If not, at least you’ll know what you have to do to get ready to buy down the road.
April 16, 2009