The Aspiring Home Buyers Profile from the National Association of Realtors (NAR) found that the American public is still somewhat confused about what is required to qualify for a home mortgage loan in today’s housing market. The results of the survey show that non-homeowners cite the main reason for not currently owning a home, as not being able to afford one.

So let's clear the air and bust this myth once and for all! 

1. Down Payment

NAR’s survey revealed that consumers overestimate the down payment funds needed to qualify for a home loan. According to the report, 39% of non-homeowners say they believe they need more than 20% for a down payment on a home purchase. In actuality, there are many loans written with a down payment of 3% or less.

Many renters may actually be able to enter the housing market sooner than they ever imagined with new programs that have emerged allowing less cash out of pocket.

2. FICO® Scores

An Ipson survey revealed that 62% of respondents believe they need excellent credit to buy a home, with 43% thinking a “good credit score” is over 780. In actuality, the average FICO® scores of approved conventional and FHA mortgages are much lower.

The average conventional loan closed in August had a credit score of 752, while FHA mortgages closed with a score of 683. The average across all loans closed in August was 724. The chart below shows the distribution of FICO® Scores for all loans approved in August.

Bottom Line

If you are a prospective buyer who is ready to act now, but are not sure if you are able to, sit down with a professional who can help you understand your true options!

The most important step in preparing to buy a home is getting pre-approved.

Don't skip this crucial step for three reasons:  

1. Know how much home you can afford. Knowing your budget will give you the confidence of knowing your dream home is within your reach. 

2. Your real estate agent will take you seriously. If you don't know how much home you can afford, or if you even qualify for a mortgage, how can an agent serve you? They can't! Most real estate agents have lenders they've vetted and trust through experience, so ask your agent who they recommend. (Our personal choice is Tammy Hajjar Miller and her rock star team at The Federal Savings Bank!)

3. You'll be ready when you find THE ONE. Without a pre-approval, your offer on a home has very little merit. In a competitive market that moves swiftly, the home you fall in love with could very well end up in someone else's (more prepared) hands, because they were ready. Getting pre-approved can take a few days, and you'd be left out of the running waiting to get your affairs together.

It's not all doom and gloom! Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so!

A considerable number of potential buyers shy away from jumping into the real estate market due to their uncertainty about the buying process. A specific cause for concern tends to be mortgage qualification.

For many, the mortgage process can be scary, but it doesn’t have to be!

In order to qualify in today’s market, you’ll need to have saved for a down payment (73%of all buyers made a down payment of less than 20%, with many buyers putting down 3% or less), a stable income and good credit history.

Throughout the entire home buying process, you will interact with many different professionals, all of whom perform necessary roles. These professionals are also valuable resources for you.

Once you’re ready to apply, here are 5 easy steps that Freddie Mac suggests you follow:

1. Find out your current credit history & score – even if you don’t have perfect credit, you may already qualify for a loan. The average FICO® Score of all closed loans in September was 724, according to Ellie Mae.
2. Start gathering all your documentation – income verification (such as W-2 forms or tax returns), credit history, and assets (such as bank statements to verify your savings).
3. Contact a professional – your real estate agent will be able to recommend a loan officer that can help you develop a spending plan, as well as determine how much home you can afford.
4. Consult with your lender – he or she will review your income, expenses, and financial goals to determine the type and amount of mortgage you qualify for.
5. Talk to your lender about pre-approval – a pre-approval letter provides an estimate of what you might be able to borrow (provided your financial status doesn’t change), and demonstrates to home sellers that you are serious about buying!

Bottom Line

Do your research, reach out to professionals, stick to your budget, and be sure that you are ready to take on the financial responsibilities of becoming a homeowner.