You’re ready to buy a house – this is an exciting time! Before you look at homes, though, there are few steps you should take.

Ready to get started? Here are the requirements you must meet to buy your first home in San Diego.

Good Credit

You don’t need ‘perfect’ credit, but it should be good. Aim for a 620 credit score or higher. If you aren’t sure where you stand, see if your credit card company or bank offers free access to your credit scores (most do).

Once you know your estimated credit score, and if it’s on the low end, it’s time to look at your credit history, as that’s what makes up your score.

Sometimes, it’s as simple as:

• Bringing late payments current and keep paying your bills on time. If you have any payments more than 30 days late, it hurts your credit score the most. Pay close attention to your payment history for the fastest results.
• Lower your credit card balances. Your credit utilization rate is the second largest piece of your credit score. Lower it by paying your balances down or asking for a higher credit limit.
• Don’t apply for new credit. New credit inquiries hurt your credit score. Wait until after you get loan approval and close on the loan to apply for any other new credit like an auto loan or credit cards.
• Don’t close any current credit accounts. Even if you don’t use your credit cards, keep them open. The longer credit length helps increase your score.

Work on your credit months before you’re ready to buy a home to give your score time to increase as it doesn’t happen overnight.

Pull your FREE credit report and see where you can improve. You can get one free report a year from annualcreditreport.com.

Money for a Down Payment

The good news is you don’t need a 20% down payment like most people think. But you do need ‘some’ money down and money for buyers closing costs.

A larger down payment ensures you get the best loan terms, and it sometimes makes sellers pick your offer over others.

At the very least, aim for a 3.5% down payment, as that’s the FHA minimum down payment requirement.

Related: San Diego FHA Loan

If you can afford more, though, a larger down payment always works in your favor. Not only will you have instant equity in the home, but you’ll get better terms from almost any lender.

A high down payment shows that you are financially stable and have your own money invested, which is a good sign to lenders.

Reserve Money on Hand

Don’t use up all your savings on the down payment, though.

You’ll need money for closing costs (usually 3% – 5% of the loan amount) and extra funds for possible repairs after the purchase.

What would happen if there was a leak or the water heater broke suddenly?

As a homeowner, these issues are now your responsibility. Have as much savings on hand as possible so you don’t go into homeownership financially stressed.

Most home loan programs don’t require a specific amount of reserves on hand.

In fact, most don’t require any reserves, but the more money you have on hand, the more likely you are to get approved.

Lenders use reserves as a compensating factor, which can make up for something risky, such as a lower credit score or higher debt ratio.

Buying a House Requires: Stable Income and Employment

Lenders look at your last 2 years of income and employment. They want to see consistency and reliability.

If you changed jobs recently, don’t worry, but be prepared. If you stayed in the same industry, it’s almost like being at the same job (in the lender’s eyes). You won’t have to do anything special to qualify.

If you changed jobs AND industries, though, you may need to prove you qualify for the new industry. For example, did you undergo specific training or go back to school? What do you have to prove that you’ll succeed in the new job?

Lenders look at your income too. If you’re paid a salary, it’s straightforward and easy.

If you get paid commission, work for yourself, or have seasonal employment, lenders will annualize your income. In other words, they’ll average out what you make over the year.

This accounts for the ups and downs of inconsistent income so you don’t over qualify or under-qualify for a mortgage.

A Low Debt-to-Income Ratio

Lenders look at your debts compared to your income. In other words, how much of your income do your current debts take up?

This is your debt-to-income ratio (also known as DTI) and the lower it is, the more likely you are to get approved for a mortgage. Ideally, your total DTI shouldn’t exceed 42%.

In other words, your total debt shouldn’t exceed 42% of your gross monthly income (income before taxes).

Some programs allow a total DTI of up to 50%, so you have some wiggle room if you can’t get yours low enough. The DTI max ultimately depends on how strong your credit profile is.

Look into this, long before you’re ready to buy a home. It can take time to lower your debt ratio and also save enough funds for down payment and closing costs.

Look at the Big Picture When you Buy a House in San Diego

When you buy a house in San Diego, you have to impress the sellers and lenders. Sellers choose buyers based on their down payment, loan qualifications, and of course, the price they’ll pay.

Lenders approve buyers based on their credit score, down payment, debt-to-income ratio, and the overall riskiness.

Do what you can to maximize your qualifying requirements to get the best loan terms available.

Even if you don’t have ‘perfect’ credit or a large down payment, though, there are plenty of loan options for everyone.

How a Mortgage Loan Officer can Help you from Start to Finish

Types of loan programs a Coole Home loan officer can help you with:

• Conventional Loan – A loan option if you have a solid credit score. Sellers and realtors prefer this type of loan over any of the government programs that are available.
• FHA loan – A popular home loan for first time home buyers due to it’s lenient guidelines and low down payment of 3.5%
• VA home loan – perfect for veterans and active duty military members. Easy to qualify for and no down payment required.
• Jumbo Loan – A mortgage program used to finance properties that are too expensive for a conventional conforming loan.
• Bank Statement program– Great for borrowers who don’t want to provide their tax return for income quafifciation.

There are a lot of options available. If you are unsure about which program best suits your needs, a loan officer will be able to help guide you.

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