Mortgage | Ralphie And Ryan https://box5915.temp.domains/~theralph Chicago Real Estate and Lifestyle Tue, 03 Jan 2023 11:57:59 +0000 en-US hourly 1 https://wordpress.org/?v=6.6.2 https://i0.wp.com/box5915.temp.domains/~theralph/wp-content/uploads/2022/11/fav-icon.jpg?fit=32%2C32&ssl=1 Mortgage | Ralphie And Ryan https://box5915.temp.domains/~theralph 32 32 184650330 Can I Buy Furniture Before Closing A House Sale in Illinois? https://box5915.temp.domains/~theralph/can-i-buy-furniture-before-closing-a-house-sale-in-illinois/?utm_source=rss&utm_medium=rss&utm_campaign=can-i-buy-furniture-before-closing-a-house-sale-in-illinois Thu, 09 Dec 2021 11:23:28 +0000 https://theralphieandryanshow.com/?p=5807 We’ve all been there – lying awake at night, envisioning the perfect interior design scheme… It’s one of the most fun parts of buying a new home! But, sadly, it’s best to leave those plans in your imagination until the deal is signed, sealed, and delivered. Otherwise, any big purchases may come back to haunt […]

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We’ve all been there – lying awake at night, envisioning the perfect interior design scheme… It’s one of the most fun parts of buying a new home! But, sadly, it’s best to leave those plans in your imagination until the deal is signed, sealed, and delivered. Otherwise, any big purchases may come back to haunt you.

Should You Buy Furniture before the closing of the house in Illinois? It’s highly recommended that most buyers put on hold any and every large transaction or request for credit. Furniture can be purchased after closing.

If it looks like everything is going well, you might be wondering “why shouldn’t I purchase furniture before I close on my new home?”. While we respect your optimism, you may not be aware of all the variables that influence your chance of getting a mortgage on your property. 

If you’re still not convinced, keep reading to find out exactly why you shouldn’t make any major purchases until after the closing process has finished. We will also cover what items and expenses you should 100% avoid before closing. 


The “No big transaction” rule explained.

The rule of thumb is – no big transactions. But what exactly is considered a big purchase during underwriting?

The definition of “big” is subjective. Some people might consider a purchase of $200 to be big, whereas others might consider anything over $1,000 to be big. It’s probably best if you consult with your mortgage lender or financial advisor about what they think constitutes as “big.” Here is a clear definition of big purchases that have cost closings:

  • New car, truck, or RV
  • New credit lines for furniture / ‘Same as cash’ (i.e., interest-free deferred purchases)
  • New appliances 
  • New department store  credit

While going through the underwriting procedure, it’s always advisable to put off any major expenditure; but if you must, make sure you’re purchasing with cash; there’s no harm in doing so. But be warned, if you are purchasing all cash and are unable to provide verification of the source, you may be asked to explain where your money came from. This will delay closing and cost more.

Things You Shouldn’t Do When Waiting to Close a Real Estate Sale.

I know you’re eager to fill your fresh property with all new furnishings and decorations. However, while you wait to close on your new house, here are a few other warnings to heed:

  • Do not request a credit report check
  • Do not close any credit accounts
  • Do not increase or request an increase in credit amounts

A change in your credit report and or a credit inquiry can change your ability to close on your home. Opening a new credit account can have the same effect as making a big purchase. This will alter your ability to close on time, and it may also affect your interest rate if you are using an FHA loan or VA loan.

Don’t forget that changing anything in your financials can change the underwriting process. It sounds harsh, but the lender simply does not want you making any changes that affect your ability to close. It’s best if you just sit tight and save up for all new big purchases after closing is completed.

The best possible scenario is actually doing nothing at all until after you close on your property – congrats on not making any big purchases! Plus, a little extra thinking time can be a good thing. Maybe in a few months, you’ll come to realize that a yellow leather sofa isn’t such a great idea…

When Is It Safe To Make A Big Purchase?

This part is simple – it’s safe after the closing process is complete. This is because, after this time, there will be no more surprises. All variables will be known to you. In this case, you won’t have to worry about adjustments being made because of your purchases.

If you’re really feeling the frustration, you can speed things up a little by making the purchase after you receive your clear to close. Just make sure to contact your loan officer about your specific situation. By and large, though, it’s better to wait. 

When is the last credit check before closing?

The last credit check before closing can happen after the appraisal is complete. This is because you have already gone through the final underwriting process and any changes to your loan will be finalized. After this, there should not be any more items requiring a change in order for you to close.

In some cases, the mortgage lender may request a final credit check before closing to make sure the lender’s risk hasn’t changed. If everything checks out, then this will not affect your ability to close early! You should also keep in mind that the lender will need to reassess your credit report if your liability has changed. It’s always best to keep your credit report in both credit pulls consistent.


Conclusion

As you can see, it’s not a great idea to make any large purchases until after closing is official. However, if the need arises and you are already purchased for some reason, call your loan officer in order to get clarification on what is acceptable.

Don’t forget to follow the rules outlined in this blog post. No big transactions during the underwriting process!

If you have any questions or are ready to buy, call us today at (708) 259-2087. We would love to help you with all your real estate needs and tell you how easy it is for FHA loans — even if your credit isn’t so great.

Have Questions? Ask The Velasco Reynolds Team!

Give us a call to learn more about local areas, discuss selling a house, or tour available homes for sale.

The post Can I Buy Furniture Before Closing A House Sale in Illinois? first appeared on Ralphie And Ryan.]]>
5807
What Credit Score Is Needed for Home Loan In Illinois? https://box5915.temp.domains/~theralph/what-credit-score-is-needed-for-home-loan-in-illinois/?utm_source=rss&utm_medium=rss&utm_campaign=what-credit-score-is-needed-for-home-loan-in-illinois Sun, 12 Sep 2021 20:27:21 +0000 https://theralphieandryanshow.com/?p=4834 A credit score is one of the major factors lenders look at during the home buying process. But, do you know the minimum credit needed to buy a house in Illinois? A 580-620 minimum credit score is required for a home loan in Illinois. Government-backed loans require a minimum score of 580, while conventional loans […]

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A credit score is one of the major factors lenders look at during the home buying process.

But, do you know the minimum credit needed to buy a house in Illinois? A 580-620 minimum credit score is required for a home loan in Illinois. Government-backed loans require a minimum score of 580, while conventional loans require a minimum score of 620.

People with higher scores stand a better chance to secure a mortgage at an attractive interest rate.

Well, to get the best interest rates on mortgage, prospective home buyers should aim to have a FICO score of 740 or above. But this number is not universal. The minimum score really depends on the type of loan and the lender’s requirement.

In this article, we will explore some nuances of a good credit score, how to check your score, and how to improve it before applying for a mortgage. In the end, you’ll see whether you’ve got the credit needed to buy a house in Chicago, with the type of loan you’d prefer.

What Is A Good Credit Score?

A credit score is a 3-digit number ranging from 300–850. Credit scores are used by lenders to make decisions on whether or not to offer you a loan such as a credit card or mortgage. They also help determine the terms of the credit, including interest rates and down payment. This magic number usually shows your potential credit risk and ability to repay loans. The higher your score, the higher the chances that you’ll be a responsible borrower.

Typically, lenders, banks, retailers, landlords, and other financing companies share your financial information periodically with the three major credit bureaus (TransUnion, Equifax, and Experian). These credit reporting agencies then use the data listed on your credit reports to calculate your credit scores by using the FICO (created by Fair Isaac Corporation) or VantageScore credit scoring system.

Since each of these reporting agencies uses different criteria to list and score your financial data, your score may fluctuate from one credit bureau to another. Your score may also change periodically depending on your credit activity.

Why Your Credit Scores From The Credit Bureaus May Be Different

Credit Scoring Model Used: Different credit referencing bureaus use different credit scoring models, with the two main models being FICO and VantageScore. While these models use similar parameters from your credit history, each has its own formula to weigh each factor.

  • Information Provided To The Credit Bureaus: Since lenders are not obligated to share your financial data with these bureaus, there are possibilities that the data shared may be different across creating differences in your scores.
  • Errors On Your Credit Report: One bureau’s credit report may have errors, that may throw off your credit score when compared to reports from other bureaus. Any error in your credit report should be reported immediately to avoid harm to your credit score rating.
  • Outdated Data: Credit data should be accessed and updated regularly. If one of the bureaus uses outdated credit data, there may be some discrepancies in your credit scores.

What is A Good FICO Score?

Although credit score rating varies depending on the credit scoring model, there is a general consensus on various credit score ranges.

FICO Credit ScoreRangeCan Get A Mortgage?
Very Poor300-499No
Poor500-579No
Fair580-669Yes
Good670-739Yes
Very Good740-799Yes
Excellent800 +Yes
According to FICO’s Website

Most mortgage companies use this FICO grading to approve or deny house loans. Typically, most lenders require a minimum credit score of either 580 for government-backed FHA loans or 620 for conventional loans. But people with higher scores are bound to enjoy better mortgage terms, including high dollar limits, lower interest rates, and longer payment periods. A recent study showed that the average FICO Score for someone with a mortgage in 2020 was 753, which falls in the VERY GOOD bracket.

What Is A Good VantageScore?

VantageScore uses similar parameters from your credit history to calculate your credit score. However, this scoring model has been expanded to capture the data for more users including students and immigrants who may only use credit cards sparingly. Here’s a look at how Vantage Score rates its credit scores:

Vantage Credit ScoreRangeCan Get A Mortgage?
Very Poor300-499No
Poor500-600Yes/No
Fair601-660Yes
Good661-780Yes
Excellent781-850Yes

What Factors Affects Your Credit Score?

Various factors affect how your credit score is calculated depending on the credit scoring model. Each factor has its own percentage value in a credit score. Some of the elements that impact your credit score include:

  • Credit utilization rate
  • Payment history of loans and credit cards
  • The total debt on your portfolio
  • Type, age, and number of credit accounts
  • Balances on your active credit
  • Number of inquiries for your credit report, except soft inquiries
  • Public records such as bankruptcy
  • Number of new, recently opened credit accounts

Benefits of A Good Credit Score

A good credit score can unlock multiple financial benefits, making it easier for you to save money and make your financial life easier. A higher credit score means that you have more options when seeking house loans and credit card loans from various financial companies. But that’s not all! Let’s look at some of the incredible benefits of having a good credit score.

  • Qualify for excellent credit card deals: A strong credit score allows you to access some of the most rewarding credit cards in the market. You also get lower interest rates, helping you to save significant amounts of money over time.
  • Access to a wide variety of loan products with appealing terms: If you have a high credit score, you can access a wide variety of loan products with higher dollar limits to help you finance big purchases.
  • Higher loan and credit approval: High credit scores show reduced risks to the lender. This means that you have higher chances of approval for your loan, mortgage, or credit card application.
  • More negotiating power: A good credit score means that you can shop around for the best deals in town. You can leverage this to negotiate for better terms from your preferred lender.
  • Easier approval for rental houses and apartments: Today, more landlords are using the credit score as part of their tenant screening process. If you have a good credit score, you have higher chances of getting a rental house or apartment.
  • Incredible rates on car and homeowner’s insurance: An above-average credit score allows you to get a reasonable deal on a car and home insurance.

How to Check Credit Score?

Every year, you are entitled to access a free credit report from the 3 major credit bureaus. These reports help you assess your past and current credit status, check for any inconsistencies and errors that may affect your score and gain meaningful insights into some of the parameters affecting your credit score.

You can check your credit scores in several ways:

  • You can request your free annual credit report from the 3 national credit reporting bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com.
  • Purchase credit score directly: If you already requested your free annual credit report, you can access another copy by buying from any of the three credit bureaus or other provides such as FICO.
  • Visit a free credit scoring website: There are various sites that offer free credit scores to help you understand your financial health. However, it important to look at the terms and conditions before sing up.
  • Check with your credit card issuer or lender: Many credit card companies have started offering complimentary credit scores to their customers. This can be accessed either by login into your account or through your monthly statement.
  • Request from a non-profit credit counselor: The National Foundation for Credit Counselling has non-profit credit counselors who can help you access your credit score and help you break down the details for you.

What Are Some Of The Uses Of Credit Reports?

  • Determining creditworthiness
  • To analyze all loan and credit accounts under one platform
  • Reporting errors on the report
  • Reviewing missed/late payments
  • Checking the credit score online
  • Making effective financial decisions, etc.

What Is the Average Credit Score in Illinois?

According to a recent report by Experian Consumer Credit Review, Midwestern states such as Illinois have some of the highest credit scores. With a national average FICO score of 710 in 2020, Illinois had a credit score of 716, which was well over the national average. This is a 7-point increase from the 2019 credit score of 709.

This means that most residents in Illinois have better chances of access to loans such as credit cards and mortgages. More affluent cities and villages such as Chicago, Naperville, and Glen Ellyn have higher average credit scores.

How to Improve Credit Score?

You can improve your credit score by practicing several consistent habits that are pivotal in keeping your credit on track. Some of these include:

  • Pay your bills on time: Payment history is perhaps one of the biggest factors that affect credit scores. Paying loans, credit cards, rent, phone bills, and other utility bills on time improves your credit score and is considered a good predictor of future performance by most lenders.
  • Make frequent payments: Making micropayments throughout the month ensures that the credit utilization is kept low, benefiting your score right away.
  • Ask for higher credit limits: Higher credit limits help lower the overall credit utilization which improves your credit.
  • Dispute errors on your credit report: Errors in your credit report can pull down your score. You should request a free credit report from the three major credit bureaus and dispute any mistakes within 30 days.
  • Become an authorized user: If you have a thin credit file, you can ask a friend or relative with a long record of responsible credit card use to add you as an authorized user in one of their accounts. This can significantly lower your credit utilization and give you longer credit history.
  • Don’t apply for new accounts too often: Frequent loan applications create hard inquiries on your report that may have adverse effects on your score.
  • Keep credit cards open: Many people make the mistake of closing their credit cards in a bid to improve their credit profile. This increases the overall credit utilization ratio and could lead to a lower score.

The Bottom Line?

Credit scores are an important facet of any personal financial planning. Good credit scores can open up a bunch of benefits including an increased likelihood of getting approved for competitive mortgages and credit card loans. You are also more likely to get higher dollar limits to help you finance big purchases while still saving thousands of dollars from better loan deals.

If you are in Illinois, having a good credit score can help you own or rent a home or apartment in some of the most opulent neighborhoods. With an average credit score of 716, the competition for credit facilities in Illinois is cutthroat. It is therefore important that you keep your credit score above this average to increase your chances for your next home purchase.

If you have any questions or would like to talk about your situation, you can call or text me any time. Thanks for reading.

Have Questions? Ask The Velasco Reynolds Team!

Give us a call to learn more about local areas, discuss selling a house, or tour available homes for sale.

The post What Credit Score Is Needed for Home Loan In Illinois? first appeared on Ralphie And Ryan.]]>
4834
Houses in Illinois: How Much Can I Afford? https://box5915.temp.domains/~theralph/houses-in-illinois-how-much-can-i-afford/?utm_source=rss&utm_medium=rss&utm_campaign=houses-in-illinois-how-much-can-i-afford Wed, 10 Feb 2021 15:07:40 +0000 https://theralphieandryanshow.com/?p=4856 It is extremely easy to be overwhelmed whenever you buy a house. After all, purchasing a home is a huge step and a big purchase. So naturally, you would want your home to be a blessing and not a heavy burden to pay. Which begs the question: How much home can I afford? To determine […]

The post Houses in Illinois: How Much Can I Afford? first appeared on Ralphie And Ryan.]]>
It is extremely easy to be overwhelmed whenever you buy a house. After all, purchasing a home is a huge step and a big purchase. So naturally, you would want your home to be a blessing and not a heavy burden to pay. Which begs the question: How much home can I afford?

To determine how much you can afford for a house definitely requires some math. If you are anything like me, you probably prefer to insert a few numbers here and there and see what figures your calculator will spit out. But the truth is, calculating how expensive you can go when buying a house is much more than just a few numbers punched into a calculator, hoping that the amount is something you can afford. There are factors that are essential to take into consideration to determine how much you can afford.

In this blog, we will go over the factors we need to determine to see how much house can you afford. Rest assured, it is not that complicated. Here I simplified it into two easy and simple steps, wherein by the end of this blog, you will be able to determine:

  • The maximum amount of loan the bank will lend you
  • The conservative maximum you can afford (Dave Ramsey’s recommendation)
  • The common factors and my recommendations

Considering Your Specific Budget and Goals

This is simple, we will be going over the basics and rules of thumb. It is important to note that the amount you can afford should be determined by you and not anyone else. Never allow your lender, realtor, or anyone else even your family members determine your housing budget.

You are aware of your income and your spending lifestyle, so you are the only one who can calculate how much budget you can put into buying your house. Having peace of mind is so much better than nights spent sleepless. Banks will often lend you an amount more than most are comfortable with. Your housing budget should only be determined by the people ultimately responsible for the loan.


Step #1: Determine Your Gross Monthly Income

The very first step is determining your gross monthly income or your before-tax income. The simplest way is by using you and your significant other’s yearly income and divide the amount by 12 for each month. If your income is fixed monthly, you can determine this using a pay stub.

Here are some examples:

Note that in order to qualify for a loan, you must document every type of income you have. Any other streams of income besides Form W-2 or your earned income that will help you qualify for a mortgage includes:

  • Alimony
  • Investment Income
  • Disability Payments
  • Social Security Pensions

Step #2: Calculate Your Debt to Income (DTI) Ratio

After figuring out your monthly income, finding the debt to income ratio will be an easier process. The only thing you need is your list of monthly obligations or expenses.

The debt to income ratio basically compares your monthly income to your monthly debt. Borrowers that possess higher DTI ratios will experience a harder time qualifying for a loan and will probably be paying a higher interest rate.

To calculate your debt to income ratio, you must first add up all your monthly debt obligations including:

  • Monthly rent or projected house payments
  • Monthly child support payments or alimony
  • Student loan payments
  • Car payments
  • Monthly credit card minimum payments
  • Any other debts you might have

After listing all of this, you can then calculate your debt to income ratio by getting the sum of all your monthly payment obligations and divide it into your gross monthly income. Here is an example:

Example #1:

Rent Payment- $1,500 a month

Credit Card Minimum Payment- $160 a month

Student Loan- $240 month

Car Payment- $300 month

—————————————————-

Total Monthly Obligations- $2,200 a month / Gross Monthly Income- $8,750 = 0.25 or 25% DTI

After figuring out what your debt to income ratio is, everything will now be a breeze. Most lenders do not consider borrowers that have a DTI of over 43%. However, there are exemptions to the case, which is based on the strength of the borrower, loan type, and lender. Here are the maximum limits of a DTI based loan type:

  • Conventional Loan- 45 to 50 % DTI
  • FHA Loan- 50 to 57 % DTI
  • USDA- 41 to 46 % DTI
  • VA- 41 to 60 % DTI
  • Jumbo Loans- 41 to 43 % DTI

When you are borrowing, it is best to pay off as much of your monthly obligations as possible. It is not suggested to run-up to the limit, so you are comfortable with your house as well as the payments.

If you purchase a house that you can not pay for, you will be what they call ‘house poor’. In this situation, you will not own your house, your house will own you. If the monthly mortgage payment is too tight, it will feel like a house with a big payment. It is tough living in a house you can’t consider as your home.


What is A Conservative Mortgage Payment Ratio?

Not a lot of people have made quite an impact on American’s everyday lives and the financial industry like Dave Ramsey did. He has an ongoing radio show for almost 30 years talking about conservative finances. If you are not familiar with Dave Ramsey’s guidelines, here they are:

  1. Save $1,000 for a starter emergency fund
  2. Pay off all debt (except the house) by using the debt snowball.
  3. Save 3-6 months expenses in a fully-funded emergency fund.
  4. Invest 15% of the household income for retirement
  5. Save for children’s college fund
  6. Pay off home early
  7. Build your wealth and give

Dave Ramsey’s Way for Home Mortgages

Here are guidelines for an extremely conservative approach:

  • A fixed-rate conventional loan.
  • A 15-year term.
  • Monthly payment of no more than 25% of your monthly take-home pay.

Here is an example following this approach:

Example #1:

Yearly Income- $75,000

Tax Bracket- 22%

—————————-

Net Yearly Income- $58,500 / 12 months = $4,875

Net Monthly Income- $4,875 x 0.25 = $1, 218

Spending $1,200 on housing while maintaining a 15-year mortgage will make your price range at Chicagoland market $100,000- $150,000.

However, Dave Ramsey’s approach may be too extreme especially with the extremely high cost of living and housing. A lot of people struggle to find affordable housing using his way. However, I think his approach is more appropriate back in his day when the dollar was still linked to gold and the FED was not printing trillions of dollars, but times have changed.


What is the Most Common DTI Ratio?

A lot of financial advisers agree with the idea that homeowners should avoid spending more than 28 % of their gross monthly income on housing and no more than 36 % on their total debt. This is referred to as the 28/36 rule, giving homeowners a quick basis on what they can afford each month. Another rule is 29/41, giving debtors extra slack on their obligations.

The 28/36 rule is often the best indicator of home affordability and peaceful nights, However, this rule does not particularly use home utilities and expenses, wherein 28% of total housing costs are a better metric that includes HOA fees, paid maintenance, and utilities. Here is an example:

Example #1:

Yearly Income- $75,000

Tax Bracket- 22%

—————————

Net Yearly Income- $58,500 / 12 months = $4,875

Gross Monthly Income $6,250 x 0.28= $1,750 monthly mortgage or 35% of Net Monthly Income

What if DTI is too High?

If your DTI ratio is higher than 43 percent and you are in need of a loan, there are some things you can do and consider to help improve your chances of availing a home loan. Simple and straightforward, the factors are:

  • Consider your budget
  • Get a second opinion
  • Increase your income
  • Add a co-signer

However, if none of these factors are an option, here are some things you can do but this requires more work for you.

  • Consider another Loan Program. Although you are likely to get the best rate in conventional, the guidelines are more strictly implemented. You can consider using an FHA Loan or a VA Loan since they have more forgiving DTI ratios.
  • Paying Down the Rate. If you have cash reserves at your disposal and you can afford to invest in your home, you can lower the payment by paying down your mortgage interest rate.
  • Restructuring Debt. There are times where you can refinance or pay down some of your loans to lower your DTI ratio. If you are capable of paying off some loans, I would suggest that you consult a lender for guidance. Remember that no debt is equal.

Here are all the basic pieces of information you need to know on how to determine how much house you can afford. I hope that this blog has helped you and provided you with insight on the topic.

Have Questions? Ask The Velasco Reynolds Team!

Give us a call to learn more about local areas, discuss selling a house, or tour available homes for sale.

The post Houses in Illinois: How Much Can I Afford? first appeared on Ralphie And Ryan.]]>
4856
How Much Money Do I Need to Buy A House? https://box5915.temp.domains/~theralph/how-much-money-do-i-need-to-buy-a-house/?utm_source=rss&utm_medium=rss&utm_campaign=how-much-money-do-i-need-to-buy-a-house Wed, 03 Feb 2021 02:54:55 +0000 https://theralphieandryanshow.com/?p=4836 There are a lot of questions to consider when purchasing a home, but the number one question most potential homebuyers ask, or want to ask but are too afraid to, is “How much cash do I need to purchase a home in Illinois?” The answer is far from simple, as there are so many variables in […]

The post How Much Money Do I Need to Buy A House? first appeared on Ralphie And Ryan.]]>
There are a lot of questions to consider when purchasing a home, but the number one question most potential homebuyers ask, or want to ask but are too afraid to, is “How much cash do I need to purchase a home in Illinois?”

The answer is far from simple, as there are so many variables in every home transaction. However, to avoid the old cliche of hedging completely, let’s look at some of the expenses and variables every homebuyer should prepare for, and in doing so we can get a much better idea of just how much cash you will need to buy a house.

First, we must break down each of the major expenses in the home buying process. This will hopefully be revealing in terms of what you can expect the expenses of your specific situation to be. By the end of this blog post, you will be able to determine what your own minimum requirements will be and how much money you need to purchase your house.

Let’s go over the loans and requirements.

Home Loan Requirements

The Down Payment

The down payment will vary depending on your credit score, the loan program, lender and your available funds. First time homebuyers often choose a 3-5% down payment.

Example= 3% down payment of $250,000 home is $7,500

Example= 5% down payment of $250,000 home is $12,500

However, any down payment under 20% will require PMI (Private Mortgage Insurance).

Private mortgage insurance is an additional monthly expense added to your mortgage. It is insurance that guarantees a borrower’s loans if the down payment is under 20%. The cost of the insurance varies. but typically, you can expect $30-$70 per $100,000 borrowed.

The Two Most Common Loan Types: Conventional Vs. FHA Loans:

Your down payment will be dependent on your type of loan. The two types you are most likely to come across are conventional loans and FHA loans:

  • The Conventional loan is a government-guaranteed loan that usually needs a minimum down payment of 3%. Typically, borrowers need a credit score of 620 or above to qualify for a conventional loan.
  • An FHA loan requires a minimum down payment of 3.5% while your credit score will only need to be 580. FHA loans require additional paperwork and home condition requirements.

Although regulations are set at the federal level, individual lenders may have tighter restrictions than stated above. I would suggest meeting with multiple lenders and reviewing offers to make sure you have taken advantage of all your options. Keep in mind minimum requirements might also be accompanied by higher rates.

Zero Percent Down Payment Options:

The two most common 0% down payment options are VA Loan and USDA Loan programs.

Both the VA loan and the USDA loan require no down payment and are programs guaranteed by the U.S. government.

  • The VA loan has no minimum down payment and no minimum credit score requirement. It is offered to all veterans, military members, spouses of veterans, and military members. Along with 100% financing, VA loans offer low-interest rates and don’t charge annual mortgage insurance
  • The USDA loan program also offers a no down payment loan, but it requires a credit score of 640 or above. The USDA loan program is offered only for homes in more rural parts of the country. But what areas may be classified as rural can come as a surprise, so this is still an option to consider in certain areas. Borrowers also need to fall under a set income threshold to qualify for this program.

Additionally, there are often down payment assistance programs available locally. Check with your lender and realtor to see if you are able to take advantage of any of those programs.

Where Can Down Payments Be Drawn From?

There are two sources of down payment funds that generally can be more difficult to use: cash and unsecured loans.

If you saved your down payment under a mattress or in an actual piggy bank, you might have trouble providing a paper trail of the funds. All unverified funds may be considered illegitimate funds and must be passed through a financial institution to be used.

Unsecured loans are also a terrible source for your down payment. The loan will add to month obligations and will indicate your inability to accumulate funds. Don’t try to pull a fast one on your lender. They are going to go through your financial statement in detail and you will get denied the loan.

Approved Sources of Down Payment Funds

The following are commonly approved of sources of down payment funds:

Personal Account

If you have been saving for your down payment and have a long record of consistent deposits, your personal checking and savings accounts may be sufficient for your down payment source. Remember to take the sum of both you and your partner’s accounts to determine your potential total down payment amount. Personal accounts are often the easiest and best option for down payment sources.

Family Gift

Your mom, dad, sister, brother, in-laws, or even grandparents can contribute to your down payment requirement. Many lenders are ok with gift money, as long as the gift money will not need to be paid back. Additionally, the lender may also require a gift letter from the family member. The IRS allows people to give gifts of up to $15,000 without paying taxes on it.

Retirement Accounts

If you are a first-time home buyer you might be able to withdraw from a traditional IRA, Roth IRA or 401K without the 10% early withdrawal penalty. Talk to your lender about all your options and fees regarding your specific situation.

What Are Typical Closing Costs?

Most homebuyers second largest expense after their down payment will be closing costs. This is by far the most overlooked and hardest to understand potential cost. Closing costs in Illinois vary, but the average closing cost is 2-3% of the home’s sales price. Closing costs vary depending on the lender, loan and the city or town your home is in.

Closing costs can include any of the following depending on your situation:

  • Title searches $300-$600
  • Title insurance $1,100- $1,600
  • Home inspections $300-$600
  • Appraisals $300-$400
  • Surveys $500-$700
  • Credit reports $50-$60
  • Attorney fees $500-$650
  • Transfer tax and State taxes – Illinois state tax is .1% and city taxes vary on location.
  • $250,000 X .025 = $6,250

The average closing cost across the Chicagoland area for a home worth $250,000 is $6,250.

To get a detailed estimate on the closing costs of homes in your desired area, consult with a local realtor or lender. For the purpose of this blog, we will be averaging out the closing costs for a $250,000 dollar single-family, Chicago home, using a median of 2.5% closing costs, the average closing cost would come to $6,250.

Cash Reserves Needed?

Even if you have sufficient income to meet your loan obligations your lender will require you to have more in reserve. Cash reserves, like many of the other topics on this blog, will have varying needs. However, the most typical cash reserve requirement is equal to two months’ rent payments.

Take for example if your mortgage including principal, interest, taxes, and insurance came to a total of $1,500. Most lenders would like to see at least $3,000 in reserves to cover your housing expense.

Cash reserves could mean actual liquid funds in a savings or checking account or could also include stocks, bonds, mutual funds, or certificates of deposits. Basically, banks are interested in anything that could quickly be turned into cash in a pinch. The exact amount you will need will depend on your loan type, your credit, and the down payment.

On FHA loans you will need enough to cover at least three months’ worth of payments, while conventional loans can range from 0-6 months of reserve requirement. VA and USDA loans do not require cash reserves; however, you should consider a little cushion to help prevent your American dream from becoming a nightmare.

If You Don’t Have Enough Cash for Your Reserve

If you don’t think you have enough liquid savings to meet the reserve requirements, don’t panic. Talk to your bank, lender, and real estate agent.

Ways to Reduce Your Upfront Cash Requirement:

The savings needed for a down payment to buy a house is often the biggest barrier to entry for first time home buyers. Fortunately, there are ways to lower or reduce your out-of-pocket requirements to purchase your home.

Here are three commonly used tactics to lower your out-of-pocket expense:

  1. Negotiate with the seller to help you with closing costs. This is a common method for first-time homebuyers. however, you can’t always count on its success. This is especially true in a hot seller’s market when this strategy is less appealing to sellers who may be fielding multiple competitive offers. Nevertheless, a properly negotiated transaction might leave room for a seller’s concession. There are limits to the total concession allowed depending on the loan.
  2. Use Gift Money. As mentioned above, family gifts are a common method of down payment assistance. There is no shame in asking for a gift from a family member that is willing to help. A family gift could give you the key to homeownership and be to build equity.
  3. Look for down payment assistance and closing cost assistance programs. Every state has programs intended to help lower-income or first-time homebuyers buy their first home. For example, in Illinois, one process that can assist with down payment and closing cost assistance is the IHDA Mortgage loan program.

Conclusion

I hope this post was helpful and gave you an idea of how much money you need to buy a home.

Although we have discussed the minimum amount of money required to close, I would recommend having more in savings than the minimum.

The purchase of a home should not be an idea you come up with overnight, it should be a well-thought-out and prepared financial move. That is why every home purchase should first start with a proper budget and savings plan. If you are in the Chicagoland area, I would be happy to assist you on your homeownership journey.

Have Questions? Ask The Velasco Reynolds Team!

Give us a call to learn more about local areas, discuss selling a house, or tour available homes for sale.

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