With the Arctic chill of the polar vortex back where it belongs and mortgage rates still near historic lows, the spring home-buying season has finally arrived.
True or false:
>> In the post-financial crisis, I can't get a mortgage with a credit score below 700.
False. In March, according to Ellie Mae — which provides loan origination and tracking software to lenders — 33 percent of all new loans went to borrowers with sub-700 FICO scores.
Quick context: A good credit score is 720 or higher on a 850-max FICO report. Higher-risk loans insured by the Federal Housing Administration, or FHA, averaged 684. Lower-risk mortgages assigned to investors Fannie Mae and Freddie Mac averaged 755, according to the March report.
If your score ranges closer to the FICO minimum, 300, you're facing some rehabilitative work before buying. A FICO score is determined by five basic categories, each weighed proportionally: payment history (35 percent), amount owed (30 percent), length of credit history (15 percent), new credit and inquiries (10 percent) and types of credit (10 percent). To raise your score, then, pay your bills on time, reduce your debt and keep balances low. Don't close credit-card accounts you no longer use, thinking it might help — it can actually lower your score.
First-time home buyers should start by researching their credit score. They're available to all consumers, free, each year from Equifax, Experian and TransUnion by visiting here or calling 1-877-322-8228.
>> Buying a home is a lousy investment.
True. The Bottom Line would rather not provide a first-person testimonial, so let's cite a study of 20-year investor returns through 2012 by Dalbar, a market research firm, cited last year in a report by the investment bank J.P. Morgan.
The smart money in real estate investment trusts returned 11.2 percent annually in that period. Gold returned 8.4 percent, the S&P 500 8.2 percent. The worst performers: homes (2.7 percent) and the average equities and fixed-income investor (2.3 percent). Inflation, meanwhile, increased 2.5 percent a year, which makes the return on a home look even worse.
Previous generations treated the house as a retirement nest egg. That formula doesn't work anymore.
>> I can't get a home mortgage with as little as 5 percent down.
False. With housing prices and mortgage rates increasing slowly, banks are accepting lower credit scores and, yes, even 5 percent down when writing home mortgages.
Lenders usually allow home buyers to borrow 80 percent and no more than 90 percent of the house's appraised value. The down payment covers the rest.
So what the highest-price house you can afford?
If you have $15,000 available as a down payment, it probably limits you to a house or condo for $150,000 at 10 percent down. With $40,000, the choices become somewhere between $200,000 (20 percent down) and $400,000 (10 percent down).
Ask prospective lenders about debt ratio. Borrowers should expect to spend no more than 28 percent of their monthly gross income — that's before taxes — on housing costs that include the mortgage, property taxes, insurance and any fees. Your monthly debt payments, everything from mortgage and credit-card bills to student loans, also shouldn't exceed 36 percent of your gross income.
>> My brain will fry if I try to do the calculations on a down payment.
False. But to avoid overload, consult an online calculator. The Bottom Line used SmartAsset.com's Down Payment Calculator, now available as a smartphone app (iOS, Android), to run some same calculations for a mythical family looking for a home in Canton.
The calculator presumes a 30-year FHA mortgage with a 4.125 interest rate and factors closing costs, property taxes in Canton, maintenance, insurance, inflation, and other costs. The calculator will not commit a buyer's entire savings to a down payment.