Contractors build new homes and list them for sale all the time. If you want to buy a brand-new home, you can look for homes that contractors just built, and you might find them in many different neighborhoods. If you are thinking of using a conventional loan to buy the house you choose, there are several things to understand.
You Need 20% Down to Avoid Private Mortgage Insurance
Conventional loans are different from other loan types, and they often have more requirements that borrowers must meet to be eligible for them. One common condition is having a 20% down payment. If you buy a house for $200,000, a 20% down payment equals $40,000. The problem with this is that many people have trouble coming up with this amount of cash. It is not easy to save $40,000.
The good news is that you can avoid the 20% down payment requirement and use as little as 3%. The downside is that you must pay private mortgage insurance (PMI) if you do not offer a 20% down payment. PMI is insurance that protects the lender that issues you a loan, and you must pay it until you have at least 20% equity in your home.
Your Debt-to-Income Ratio Must be 43% or Less
The next thing to know is that your lender will calculate your debt-to-income (DTI) ratio before approving your loan. With conventional loans, lenders require DTI ratios of 43% or less. The DTI ratio compares your income with your debts, and it considers your new mortgage. Lenders will base loan approval amounts on several things, but DTI is one of the primary factors they use.
You Can Benefit from a 740 Credit Score
While you do not need a credit score of 740 to qualify for a conventional loan, it helps. A credit score of 740 or higher proves that you have excellent credit and will help you get the best terms on your home loan purchase. If your score is less than this, you might still qualify for a conventional loan, though. You may need a score of at least 620 to qualify, but it depends on the lender.
Knowing these three things can help you decide if you should pursue a conventional loan when buying a new house. If you want more information about these loans or others, contact a company that offers home loan purchases for more information.