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It’s no secret: Housing costs are expensive. Rising rents and a strong real estate market are making it harder for first-time buyers to get a piece of the American dream.

Buying a home means getting these four areas of your finances in shape:

  • Credit
  • Debt
  • Income
  • Assets

If you do not know where you stand, and if you want to make an offer on a home, getting pre-approved is an important first step. Getting your financial house in order should be priority number one if you intend on buying a home now or down the line. A pre-approval involves having a lender ensure that your credit score is sufficient, you have the cash to close to purchase the home, your income supports the debt load plus your other liabilities, and you have the financial character and capacity to make a big-ticket purchase. While credit score, income and debt allowance are all important puzzle pieces, your cash to close reigns as king.

The Hard Reality

There are no more specific first-time homebuyer programs available anymore. All the first-time homebuyer programs that did exist have long since expired.

While there is a possibility of finding a county, state or HUD program to assist with down payment, the next order of business is coming up with closing costs, which equates to just about 2.5% of the home price (not the loan amount). For a $400,000 home, that’s $10,000 needed just for closing costs, independent of the monies used for the down payment. The challenge that first-time buyers face is having enough money both for the down payment and closing costs.

Here’s what will happen in the following situations:

If you have an excellent credit score, but you don’t have the cash…

Then your home buying project will get put on hold until you have enough money to seal the deal.

If you have very strong income, even with little debt, but you don’t have the cash…

Then you’re still at square one.

To purchase a home, you’ll need at least a 3.5% down payment to get your foot in the door and enough income to support financing a high debt load, due to financing a bigger loan size because you have less cash down.

Here’s a quick cheat sheet for total cash to close on various purchase price points:

  •  Home price $200,000:  down payment + closing costs = $12,000 needed
  •  Home price $300,000:  down payment + closing costs = $18,000 needed
  •  Home price $400,000:  down payment + closing costs = $24,000 needed
  •  Home price $500,000:  down payment + closing costs = $30,000 needed

These illustrations assume using a 3.5% down FHA Loan. Notice for every hundred thousand dollars in purchase price change on an FHA 3.5% down loan, the total cash to close increases by $6,000. If you’re looking for a home in the mid-range, say $350,000 — that would be an additional $3,000 needed, totaling $21,000, to close escrow on such a home. Put simply, for every $50,000 increment in purchase price, you’ll need $3,000 more in cash to close.

Mortgage Tip: A conventional loan with 5% down could be a better option for dropping private mortgage insurance in the future, as well as avoiding FHA’s upfront mortgage insurance premium, a pricey 1.75% of the loan amount.

Acceptable Sources of Cash

If you don’t have the cash, there are other practical sources of cash to consider for your home purchase:

  • Gift monies — an excellent source of funds used to buy a home, as long as the money can be documented and paper trailed with an executed gift letter; there are no mortgage gift fund limitations.
  • Retirement funds — this includes stocks, bonds, IRA and 401(k); all of these accounts are acceptable sources for borrowing funds against should your financial situation merit doing so.
  • Cash value life insurance – this is another form of acceptable funds to procure cash from for your big purchase.
  • Security deposit rental — as long as this money can be documented, and you have a working relationship with your landlord, security deposits are acceptable.
  • Changing jobs — This is not a lending will red flag like it used to be, and in fact, making the plunge could be to your advantage if you can generate more income to enhance your savings.

Home Lending Is Getting Easier

The mortgage requirements for buying a home are loosening. When buying your first home, consider whether you can support a mortgage payment and have the cash necessary for the big-ticket upgrade (this calculator can show you how much house you can afford). If you don’t have the money saved up, or if you don’t have access to the funds, or if the project is on the longer-term projection — that’s OK as long as you’re doing everything you can do to better your financial position by continuing to save, while keeping debts low and manageable. In the meantime, keeping your credit in good shape, or working toward better credit, can give you access to lower interest rates, which can also help the affordability of this big purchase. You can get your credit scores for free every month on Credit.com to track your progress.

More on Mortgages & Homebuying:

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