7 Unexpected Hurdles to Financing a New Home ...

Financing a new home is an exciting time, but unfortunately, several hurdles can destroy your plans. If you don't familiarize yourself with the home buying process, you might not fully understand what lenders expect from you. And if you don't have your ducks in a row, getting the keys to a new house can be more challenging than you anticipated. Here are seven hurdles to financing a new home.

1. Some Banks Require a 700+ Credit Score

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There was a time when you could get a conventional mortgage loan with a credit score of 650 or higher when financing a new home, and get a relatively decent interest rate. Unfortunately, banks have tightened the belt in recent years. And today, many banks require a 700 credit score minimum for conventional loans β€” some require higher scores, such as 720+.

2. You Need a down Payment

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You can have an 850 credit score and a good job, but without a down payment, conventional lenders and lenders that offer FHA home loans will not approve your mortgage application. No down payment mortgages are still available to veterans and those who get a USDA loan. But if you’re getting a conventional or FHA financing, you’ll need a minimum down payment between 3.5% and 5%.

3. Closing Isn't Cheap

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A down payment is just one hurdle to financing a house. There’s also closing costs, which can be between 2% and 5% of the sale price, depending on where you live. And unfortunately, some banks will expect you to pay some of your closing costs out-of-pocket. You might be able to wrap closing costs into your mortgage loan, or ask for seller concessions. But these provisions are not guaranteed, so you’ll need to prepare for this expense.

4. You Need a Cash Reserve

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This rule isn't written in stone, but some lenders will review your bank accounts to determine whether you'll have a cash reserve after closing on the house. Often times, lenders will require a 2 to 3-month cash reserve. Therefore, if you empty your bank account to pay your down payment and closing costs, a lender may view you as a risk borrower and postpone your mortgage until you build a larger cushion.

5. Two Years of Steady Employment

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This is a hurdle that some people don't consider. Because lenders require two years of steady employment, if you’ve recently graduated from college, or if you’ve had employment gaps due to a layoff, this might impact your ability to get a mortgage loan β€” at least right now. Even if you have steady income, you might have to wait 24 months to get approved for financing.

6. Debt Counts against You

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Debt may not kill your chances of getting a mortgage loan, but it can certainly reduce how much you qualify for. When approving a mortgage application, lenders will look at your debt to income ratio. And if you have a huge car payment, large student loan debt, or too much credit card debt, this can reduce your buying power.

7. Selling Your Existing Home

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Unless you can afford to carry two mortgages, many lenders will require that you sell an existing home before they’ll let you buy another home. This might seem unfair, especially if you're confident that your home will sell. However, this is for your protection. There's no way to predict when your home will sell, and it might sit on the market for several months. As a result, you'll be stuck with two mortgage payments, which can have a major impact on your personal finances.

There are hurdles to buying a home, but it’s not impossible. Often times, this requires careful planning and research to make sure that you’re able to meet a bank’s requirements. What are other hurdles to homeownership?

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