This post is part of an ongoing series in which we answer some of the most common questions among first-time home buyers in California. Today’s question is: “What are the basic mortgage qualification requirements for first-time home buyers in California?”
For the sake of simplicity, this article focuses on three of the most important mortgage qualifications for home buyers: the down payment, the credit score, and the debt ratio.
Mortgage Qualifications for California First-Time Home Buyers
In 2017, three of the most important mortgage qualification requirements for California first-time home buyers are (1) the down payment, (2) the credit score, and (3) the debt-to-income ratio.
Granted, these are not the only qualification criteria for mortgage loan approval. But they are three of the most important factors. So, first-time home buyers should have at least a basic understanding of them.
1. The Down Payment
This is one of the most important mortgage requirements for first-time buyers in California, because it’s an upfront expense that must be paid at closing. It’s also a primary concern for a lot of buyers, due to the amount of money that’s involved.
The good news is that there are several low-down-payment mortgage options available in California. In 2017, it’s possible to obtain a conventional home loan with as little as 3% down. The Federal Housing Administration (FHA) loan program offers down payments as low as 3.5% of the purchase price. Additionally, eligible military members and veterans could qualify for a VA home loan that provides 100% financing, with no down payment at all.
In many cases, the down payment funds can be provided by a family member, an employer, or some other approved source. So it doesn’t necessarily have to come out of your own pocket.
The key takeaway here is that first-time home buyers in California are not always required to put down 20% in order to qualify for a mortgage loan. There are many different loan programs available these days, some with flexible qualification requirements and low down payments. So you shouldn’t make assumptions about your ability to qualify for a mortgage in California, or to afford a down payment.
2. The Credit Score
You’ve probably heard about the importance of having “good credit” when it comes getting a mortgage loan. But what does that mean, exactly?
A consumer credit score is a three-digit number computed from the information found within a person’s credit reports. These scores say a lot about how a person has borrowed and repaid money in the past. People who tend to pay all of their bills on time usually have higher scores, while those with a habit of late payments and delinquencies generally have lower scores.
Credit scores are another important mortgage qualification for California first-time home buyers. Generally speaking, a higher number can improve your chances of qualifying for a home loan, while a low score could potentially make it harder to qualify.
The FICO credit score, which is widely used in the lending industry, ranges from 300 to 850. A higher score is better, when it comes to home loan approval.
It’s important to realize that there is no single “cutoff” point for credit scores that’s used across the industry. Qualification standards can vary from one mortgage company to the next, and also among different loan programs.
With that being said, most lenders today prefer to see a score of 600 or higher for loan approval in California. But again, this number is not set in stone. So you shouldn’t make assumptions about your credit score as it relates to mortgage qualification.
3. The Debt-to-Income Ratio
When you apply for a home loan in California, the mortgage lender will review your current debt and income situation. They do this to ensure you’re not taking on too much debt, with the addition of the monthly mortgage payments.
The industry term for this is debt-to-income ratio, or DTI, and it’s another mortgage qualification requirement for first-time home buyers in California. These ratios are basically a comparison between the amount of money you earn, and the amount you spend each month to cover your recurring debts.
Generally speaking (and there’s the word “generally” again), lenders prefer borrowers to have a total DTI ratio no higher than 43% – 45%. But, as with the other California mortgage qualification standards above, there are exceptions to this general “rule.” In fact, it’s more of an industry-wide standard than a hard-and-fast rule. So don’t be discouraged if your debt ratio exceeds this number.