Looking to buy first home

[cutiepi3131]

I am planning on buying my first home next summer. I currently have a Navy Federal card with a $5100 balance (the limit is $13,300). I also have a Barclaycard that has a balance of $499 and a Firestone card with a $590 balance (both of these cards will be paid off in full in October). I have student loans and am paying a total of $446/month. I know that I need to raise my FICO scores (on this site it listed 640 as my mortgage score) and am looking for any other guidance as to what I can do to better prepare myself for buying a home. I am not too confident I can raise my scores high enough to qualify for a convential loan as I had a bankruptcy discharged back in July 2013. Any guidance?

[Anonymous]

If this is your first home, you don't need to do a conventional loan. A 640 more than qualifies you to do an FHA, which only requires 3.5% down and I think the DTI (debt to income) ratio is 41%, which means that all of your revolving and installment debt plus the new mortgage must be at or less 41%. If you're waiting a year from now, you have plenty of time to save a downpayment plus pay down your revolving debt. Paying down those two smaller credit cards to <10% of their balance will have a huge positive effect on your credit scores. You will be in a good position come next year (and possibly even now depending on your readiness, savings, and DTI).

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@cutiepi3131 wrote:

I am planning on buying my first home next summer. I currently have a Navy Federal card with a $5100 balance (the limit is $13,300). I also have a Barclaycard that has a balance of $499 and a Firestone card with a $590 balance (both of these cards will be paid off in full in October). I have student loans and am paying a total of $446/month. I know that I need to raise my FICO scores (on this site it listed 640 as my mortgage score) and am looking for any other guidance as to what I can do to better prepare myself for buying a home. I am not too confident I can raise my scores high enough to qualify for a convential loan as I had a bankruptcy discharged back in July 2013. Any guidance?

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[cutiepi3131]

Thanks! That helps to ease some of my worrying

[Gmood1]

I was just reading an article about this today. Not sure how true it is, but take a look. http://www.fool.com/investing/general/2015/01/25/dont-be-fooled-by-the-new-fha-mortgage-insurance-p....

If this is true you can do a conventional loan with 3% down being a first time borrower. If you're in a rural area, there are some other program options available under certain guidelines other than FHA.

[Anonymous]

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@Gmood1 wrote:

I was just reading an article about this today. Not sure how true it is, but take a look. http://www.fool.com/investing/general/2015/01/25/dont-be-fooled-by-the-new-fha-mortgage-insurance-p....

If this is true you can do a conventional loan with 3% down being a first time borrower. If you're in a rural area, there are some other program options available under certain guidelines other than FHA.

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Let's compare just principal and interest payments over the life of the loan for both options (let's also go with a 760 credit score to try and tip the scale in favor of conventional):

FHA w/ 3.5% down

Interest rate: 3.75%

Mortgage insurance: 0.85% for life of the loan

Principal + interest + mortgage insurance = $1288.16

Total cost over 30 years = $463,737.60

@(360 payments @ $1288.16)

Conventional w/ 3% down

Interest rate: 4.375% (pricing takes a hit for conventional w/ LTVs 95.01-97%)

Mortgage insurance: 1.05% until loan reaches 78% LTV (PMI automatically cancelled)

Principal + interest + mortgage insurance = $1422.96

Will take 10 years and 8 months, or 128 payments to reach 78% LTV.

Total cost over 30 years = $463,037.52

@(128 payments @ $1422.96 + 232 payments @ $1210.77)

These rates are actual quotes I pulled using our pricing software. To summarize, even with a 760+ credit score you'd have to live in a property for 29 years and 3 months before you will come out ahead w/ a 3% down conventional vs 3.5% down FHA. Not sure who writes these articles, but I wish they'd analyze some actual data before than throwing terms like "foolish" around.

[StartingOver10]

^^^Awesome analysis dpeezy.

[Gmood1]

Agreed! I like the way you broke it down. 😊