January 12th, 2022Verify your mortgage eligibility (Jun 27th, 2022)
- 1. Do you need good credit?
- 2. How high does my income need to be?
- 3. Buying in Utah
- 4. Loan Programs
- 5. Should I wait to buy?
The average age of the first time home buyer is about 33 years old, yet I would wager the average in Utah would be lower. With a strong economy and traditional family structures more common, I see many first time buyers in their early and mid twenties regularly. Whether you are 18 or 80, buying your first home is a huge goal to achieve and you’ll need some understanding to guide you through the process.
1. Do You Need Good Credit?
Your credit score is an important part of whether an underwriter will approve your home loan. While there are many other pieces that can make or break your pre-approval, credit is very important and is one of the few areas you can control yourself.Verify your mortgage eligibility (Jun 27th, 2022)
Depending which type of mortgage you are trying to get approved for, here’s the different minimum credit scores you would need to have:
Utah Housing Corp.: 620 / 660 (Score/FirstHome)
*These score requirements will vary slightly at different lenders, but these figures are accurate as of today for PRMG and many other of the largest mortgage lenders. Technically VA, FHA, and Conventional loans could all be approved under certain circumstances with lower scores, but it is much less likely and not allowed by all lenders.
Good news, you can usually increase your credit score with a few simple actions if you are short of the requirements. In many cases, you can pay down the balances on your current credit cards to climb your score rapidly. If you don’t have very much credit history, you can open a credit card through a national bank and start seeing improvements within a month or so! To learn more about credit scores and how you can improve your score, read our article on credit here.
2. How high does my income need to be?
Theoretically, there is no minimum income requirements to buy home and get a mortgage. But there is a mathematical formula that you can easily do on your own to determine what a mortgage lender will base your approval on.
$17 per hour x 40 hours = $680 per week gross income. $680 x 52 weeks = $35,360 yearly gross income.
$35,360 / 12 months = $2946.66 gross monthly income.
From there, a loan officer calculates what percentage of your monthly gross income is already going towards debt payments like car loans and credit cards as well as the new mortgage payment.
DTI is an abbreviation for Debt to Income Ratio. If you have a $10 credit card payment and earn $100 per month, you have a 10% debt-to-income ratio. Debt monthly divided by income monthly.
Debt ratios for each mortgage type vary, much like the seperate requirements for credit scores. For this example, we will use a good guide number of 45%. To read a full article about debt to income ratios click here.Verify your mortgage eligibility (Jun 27th, 2022)
If monthly income is $2946, then we would use 45% which is $1326. That is the maximum amount of total payments you would be allowed to have going towards debt. Essentially, you would qualify for a $1300 mortgage payment. Where it gets tricky from there is that 45% would include all debt payments and not just the mortgage. So if you have a $10 credit card and a $200 car payment, you would subtract those payments leaving you with about $1100 for a mortgage payment.
I always provide payment estimates for unlimited scenarios free, all you have to do is reach out! So don’t let yourself wonder about your debt ratio or qualifying numbers. Click here to find out.
3. Buying in Utah: Specifics of our state
Utah is an amazing state with a number of reasons attracting people to live here. Our terrain covers best snow on earth, to majestic sand dunes in a dry desert. Iconic red rock in one corner, and lush high-altitude forests in another. But our economy and real estate market are in a class of their own as well.Verify your mortgage eligibility (Jun 27th, 2022)
To buy a home in Utah, you need to know your areas and price ranges. The same home might be listed for $450,000 in Salt Lake county, but only $250,000 in Sanpete county. A fifteen minute drive across parts of Salt Lake City might vary home prices by $50,000. How far can you live from your place of work? Do you want to be close to a relative, friend, or scenic destination?
Ultimately, don’t give up on your dream of buying your first home just because you see home prices that look out of reach. I see first time buyers all the time that think you need to be over $400k to find a decent home, only to realize they qualify for $300k and are still able to find a nice townhome or a great home in a smaller town. In 2022, I have seen single family homes as cheap as $150k list price in a small town and condos for $250k in main parts of Utah County.
With the wide range of areas you could choose to live in, it is also critical that you have the right real estate agent and loan officer that understands the area. Knowing how hot a market is and what loan products you can use might save you thousands of dollars compared to a someone who doesn’t know the differences between Cache Valley, Salt Lake Valley, or Pine Valley. A local and experienced agent knows if you need to offer $20,000 over asking price, or if you can get $5,000 from the seller for closing costs. I only work with trustworthy and well-vetted real estate agents, and I’m always happy to recommend someone that might be best for your specific situation. Call or text me anytime at 801-960-8258.Verify your mortgage eligibility (Jun 27th, 2022)
4. Loan Programs in Utah
Homeowners in Utah are eligible for all the typical loan types such as conventional, FHA, USDA, VA. However Utah does have a unique program to Utah Residents only, and it’s known as Utah Housing Corporation. Here’s a brief summary of each loan type and if you want to learn more about a specific loan type, reach out to us or look for other articles on our blog.
Conventional: Most common loan type and most flexible options for personal vs investment use homes. First time buyer programs with only 3% down, loan amounts limited by area but mostly at $647,200 and under for the year 2022. DTI approvable up to roughly 49%.
FHA: More flexible with lower credit scores, history of bankruptcy and foreclosure, etc. As low as 3.5% down required, and DTI is approvable up to roughly 54% Lower loan limits generally speaking than conventional, with the average for most areas at $420,680 in 2022.Verify your mortgage eligibility (Jun 27th, 2022)
USDA: Specifically designed for more remote and rural areas. See map below for eligible areas in Utah, but it is essentially any location outside Salt Lake and Utah Counties. DTI is more strict at 41%, and USDA loans are a little less forgiving about credit issues. Finances up to 100% of property value, so no cash down required excluding closing costs.
VA: Excellent terms and less-strict rules than many other loans, but restricted to Military affiliation. Must be active duty, reserve, retired, or spouse of deceased military to be eligible for VA loans. Does not measure debt-to-income the same way since it prefers a calculation of “residual income” or the amount of income left after debts and bills are paid.
Utah Housing Corporation: Excellent option for first time home buyers! These loans are technically just an FHA or Conventional loan type, but then Utah Housing provides a second loan amount to cover your down payment and closing costs. So under an FHA loan you can finance 96.5% of the home price, and then you would have a second loan for 6% of home price which covers your 3.5% down and the remaining closing costs. There are a couple different types of loans Utah Housing offers, but I won’t go into detail in this summary. DTI is more restrictive than FHA and Conventional, capped at 45%. Utah Housing also has additional restrictions to qualify such as maximum household income, home price, and credit guidelines.Verify your mortgage eligibility (Jun 27th, 2022)
5. Common Mistakes of home buyers
Should I wait to buy a home?
The most common mistake I hear potential home buyers tell me is, “Should I wait to buy a home until….” Until home prices drop, or until I have a bigger down payment, or a variety of other reasons.
While there are good reasons you might need to wait before buying a home, most of the time I hear reasons that would end up costing the person more money by waiting. Home prices move steadily upward as a general trend, and no one can time the small, or large, drops in the housing market. Utah is currently ranked as one of the fastest growing states, and hottest housing markets in the country.
Let’s say as an example, you wanted to save up more down payment before buying a home and you are able to save an additional $5000 in one year. If you are looking at a $400,000 home today, it might appreciate 5% making it $420,000 one year later. So by waiting and saving up $5000, you actually missed out on $15,000 of home price climb. By purchasing today, the home is helping you generate savings to use as down payment for the next home, equity to pay off debts, or cash for your retirement later on. Another unknown element that might stop you from buying a home in the future is uknown interest rates. Mortgage rates change constantly and will affect how much of a mortgage payment you can afford.Verify your mortgage eligibility (Jun 27th, 2022)
In most cases, you should buy a home as long as it won’t create financial hardship for your family, you don’t plan on moving in the near future, and you are reasonably financially prepared for homeownership.
Thanks for reading my blog and I sincerely hope you learned something that will help on your journey to homeownership. Please reach out to me with questions about your own scenario, or even if you have a topic you’d like me to cover in depth! Email: email@example.com
– Zac Stiles, Mortgage Loan Officer serving 48 states from here in Utah. (nmls # 2072340, PRMG Driggs Mortgage Team)