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In this episode, Chelsea walks viewers through the steps anyone needs to take before they can buy a house, from researching mortgage options to raising their credit scores to saving enough for closing costs and a house emergency fund.

This video is sponsored by myFICO. myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. 90% of top lenders use FICO® Scores—do you know yours?
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FHA requirements:

USDA loans:

Conventional loan types:

Tasha Cochran video:

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Home cash reserve:

Shopping mortgage rates:

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Hey, guys. It's Chelsea from The Financial Diet, and this week's video is sponsored by myFICO. Now, one thing that we don't talk about all the time here on TFD but is always a pretty big subject of interest from you guys is home-ownership and the process of buying a home. Now it's true that many millennials are waiting until later in life to buy a home, and that does make sense when you consider a lot of financial realities of our generation, but it is still a goal for many, especially in the longer term. Full disclosure, I'm not currently personally a homeowner myself, but it is high enough on my to-do list that my husband and I are actually in the very early stages of getting pre-approved for a mortgage, so we can start shopping. The good news for most of us is that if we plan with the right budget and long term financial adjustments, we keep a realistic idea of the home we can afford and that is right for us, and we prioritize it consistently in our financial management. Home-ownership can be a reality, but we have to prepare for it, and here are nine of the things you are going to want to check off your list in order to buy a home.

Number one is deciding that you actually even want a house because although it might seem obvious that home-ownership is an automatic next step for young adults, it is not necessarily the right choice for everyone. I cannot tell you how many times I've heard phrases like renting is just throwing away money because you're not building equity in that property, which I don't think is a very logical way to look at it. Because, ultimately, you're not throwing away money, you're paying for a place to live. And while home-ownership may in some financial situations be a better option, it's not an automatic guarantee. But I think it's also tied up in the fact that a lot of us tend to have a very outdated view of home-ownership in the sense that you're not a real adult until you become a homeowner, and these views simply do not take into account the many benefits of not being a homeowner. First and foremost, if you are renting, the property's owner is responsible for the maintenance and upkeep and repairs of the home. You might have heard of people referring to home ownership as sometimes being a money pit because of all the things that can go wrong in a house, or all that it may need just to get it up to a livable standard. When you're renting, these major repairs and maintenance are simply not your problem. Renting also gives you a lot more flexibility. For example, if you may need to move on a shorter timeline because of employment, or relationships, or any other personal reason, being able to leave a lease is much easier than being able to sell a home in what may not be a good market for it, or the right time for you. Also, it's important to note that buying a home is not the only way to set yourself up for a healthy financial future. For example, investing in a retirement account with all of the tax advantages that that provides and expecting average market returns can set you up for amazing long-term returns on your money. This is of course not mutually exclusive with home-ownership, but it's important to remember that there isn't just one way to set yourself up, and to also understand that if home-ownership isn't right for you at the moment, doesn't mean you can basically do nothing productive for your financial future. Now, of course, home-ownership does have many advantages and can be an amazing choice for you financially, but you have to set yourself up to get there.

So, the second thing you'll want to do is get your FICO scores in shape. Like many big money goals, buying a home typically requires you to have good FICO scores. The credit score that you will need in order to apply for a home will depend on a lot of factors, such as the lender and the type of loan you're applying for, but more on that in the next point. For most conventional mortgages, you will need a credit score of at least 620 to be considered. However, the higher score you have, the better chance you'll have of qualifying for a lower rate. But did you know that there are specific versions of the FICO score that are used by mortgage lenders? Mortgage lenders usually pull the score versions from all three credit bureaus, and then they use the middle score for their lending decision. So you need to know your mortgage scores from all three credit bureaus to be sure that you're looking at the middle score that your lender will use-- that's where myFICO comes in. If you haven't heard of myFICO, yet myFICO is the consumer division of FICO-- the people that make the FICO scores. While there are lots of places to find a credit score online, there aren't many places outside of myFICO where you can find all three of your mortgage scores. And while they may look the same, other credit scores can vary as much as 100 points from your FICO scores. Do your research ahead of time and don't be surprised by your score when you apply for a mortgage. In addition to all three mortgage scores, myFICO allows you to compare your FICO scores and credit reports from all three bureaus-- Experian, Transunion, and Equifax, side by side. You can make sure to get the right score for your credit goal, whether it's FICO scores used for mortgages or you're in the market for an auto loan or credit card. Check out the link in our description or visit to get more information.

Number 3 is researching your mortgage options, which is actually at the current stage of the process that I am in. Depending on where you live, your finances, and your credit, you may have several different mortgage options available to you at any given time, some of which will require much less than the famed 20% down payment that many of us are used to hearing about. Here are just a few options beyond a conventional mortgage. An FHA loan, often cited as a good option for first time home buyers. If you have a FICO score over 580, you may be eligible for an FHA loan with a down payment of just 3.5%. FHA loans typically require a debt to income ratio of less than 43%, and we'll talk about this more in my next point. A USDA loan is helmed by the US Department of Agriculture, and this type of loan is typically for those with low-to-moderate incomes and in largely rural areas. If you're a first time buyer or don't meet typical mortgage requirements, these can be a good option as USDA loans don't require a down payment and can have a lenient credit score requirement. However, there are strict guidelines for where an eligible property can be located and strict income limits. The annual income limit for a one to four person household in most eligible counties is $90,350, and $119,200 for five to eight member households. In a higher-cost area like San Francisco County, the limit jumps to 212,550 for smaller households, and 280,550 for larger ones. The USDA sets limits at or below 115% of the median household income in each region and updates them annually. There are also different types of conventional loans, such as fixed-rate and adjustable-rate. Whether they're conforming or nonconforming, all mortgages require you to pay interest. With a fixed-rate conventional loan, the interest rate stays the same for as long as you have the mortgage. Many buyers choose a 30-year fixed-rate conventional loan because it usually results in an affordable monthly payment, but shorter terms are also available. The alternative to a fixed rate mortgage is an adjustable rate mortgage, or ARM. Conventional loans with adjustable rates, also known as hybrid ARMs, have rates that may go up or down over time. ARM rates usually adjust annually after an initial fixed rate period of three, five, seven, or 10 years. Lastly, we'll also link you in the description to a TFD video from our friend Tasha Cochran where she details the specifics of getting a VA loan herself which are available to veterans. At the end of the day, you'll want to do the research to find out the mortgage that makes the most sense for you both now and down the road, which brings me to my next point.

Number 4 is calculating how much house you can afford. Depending on the kind of loan you get, your mortgage payment will not usually be as straightforward as your rent payment. On top of your monthly mortgage payment, you'll also have to budget for property taxes, which can be pretty damn high in places like New York City, private mortgage insurance, which you'll typically need if your down payment was less than 20% and can often cost a few thousand dollars a year, homeowner's insurance, homeowner's association fees, et cetera. Additionally, your mortgage rate will depend heavily on your credit score. While Fair Credit may qualify you for a mortgage, your best chance of getting the lowest possible rate is going to be from having a score in the excellent range. We'll link you in the description to a home affordability calculator.

Number 5 is determining how much you need to save before closing. Now my previous point was all about the costs associated with owning your home on the long term, but we also need to think about how much it actually costs you to get into your home initially. When you're a renter, your cost of getting into your unit are fairly limited and straightforward, often a month of security deposit and your actual cost associated with moving, if you're not handling it yourself, but if you're a buyer you have much more to consider. You have your down payment, which is up to 20% of your total purchase price depending on the type of mortgage you get. Your closing costs, which are about 2% to 5% of the loan principal, and can include application fee, appraisal fee, credit check fee, origination and/or underwriting fees, title insurance, title search fee, and transfer tax, if applicable. Lastly, a home emergency fund, which we'll get into at a later point. We'll link you to a complete list of closing costs in our description.

Number 6 is creating a list of must-haves and nice-to-haves. Unless you have a completely unlimited budget, in which case, why are you watching this channel? No home you buy is going to be completely perfect, especially not right off the bat, so it's important to make a list where you actually understand what is absolutely non-negotiable for you, and what is negotiable, but nice to have. Because once you start looking at places, it's very easy to get those two things confused. And the difference here is pretty self-explanatory, your needs should be things that you really absolutely cannot live in the home without, whereas your nice to haves, no matter how nice they would be to have, are things that can ultimately be negotiated with. Being clear about the difference between these two things is crucial to making sure you're not spending up to the absolute maximum on the home that you could afford, which will often leave you without any wiggle room in your budget, or for incidentals, which you absolutely want to avoid no matter how much that broker is trying to get you to go up to your limit. When determining these lists, here are a few things you'll want to consider. Location. Where do you want to live? Is it within your price range? Number of bedrooms. How many does your household need versus how many would be nice to have. Does anyone in your home need their room to be on the first floor? The type of home you want-- single family standalone, townhouse, condo, et cetera. Total indoor and outdoor space. How much do you want? Will moving slightly further from your city or town center be worth it if it means more space for less money? Distance to public transportation, being move-in ready, i.e. No renovations imminently needed. Are you willing to put in some work or to hire a contractor for a lower purchase price? Garage or parking space, which is a major consideration if you drive, but a total non-necessity if you don't. Central air conditioning. If you live somewhere really warm, this might be an absolute need. But if you live in northern New England and only really turn on the AC for a month out of the year, would window units suffice? Amenities. For instance, do you absolutely need in-unit laundry or even a separate laundry room? Flooring. Are you OK with wall to wall carpet, or must you absolutely have hardwood? We'll link to a good home checklist to get you started in the description.

Number 7 is having a robust emergency fund. When you own a home, there's a lot to consider having available in your emergency fund that goes beyond your usual three to six months of expenses that we've talked about many times on this channel. For example, if something in your home needs fixing, you'll be on the hook to pay for it, and homeowner's insurance may not cover it right away or in full. According to, your cash reserve target should be about 1% to 3% of your home value. So, if your home is worth $500,000, Ellis suggests setting aside $5,000 to $15,000, and of course, each situation is different. A homeowner with a new home with all new systems and appliances might not need to tap into a home repair emergency fund, while fixer-uppers and old homes of course will likely require that money sooner.

Number 8 is to shop around for your home and your mortgage. Just like you shouldn't put an offer on the first home you see without checking out any other options, you don't want to necessarily rush headfirst into the first mortgage that is offered to you either. You'll want to apply for mortgages from several different lenders to see the best rates that you'll be offered, and don't worry too much about the impact on your credit. Some people worry that each time a lender makes a credit score inquiry it depresses a borrower's credit rating. But credit agencies can tell when a homeowner is simply making the rounds, and they recognize that mortgage-related queries usually result in a single loan. Consequently, agencies cut house-hunters some slack, and don't allow the multiple queries to negatively impact credit scores, provided that the loan hunting occurs within a narrow time period. For example, FICO scores disregard multiple inquiries when they happen within a 45-day window. And lastly, remember that you can negotiate. Once lenders provide estimates, borrowers are entitled to negotiate for better terms, especially if they can make above-average down payments or if they boast excellent credit histories. This may include asking lenders to shave interest rates or reduce certain fees.

Lastly, number 9 is take time to find a trusted realtor. Before you start the process of actually buying your home, you'll want to find a realtor whom you trust, enjoy working with, and you feel shares your best interests. Testimonials are great, especially when they come from someone you yourself trust. And, according to Bankrate, look for a real estate agent who is a Realtor with a capital R. That means they're a member of the National Association of Realtors and have formally agreed to abide by the group's code of ethics. Some realtors also have certifications to show that they've completed training in a certain area of real estate. Some designations include a CRS, or Certified Residential Specialist, someone who completed additional training in handling residential real estate. An ABR, Accredited Buyer's Representative, completed additional training in representing buyers in transactions. And SRES, Senior Real Estate Specialist, completed training aimed at helping buyers and sellers aged 50 and older. Talk to several different realtors before you make your decision, do your research, and make sure to review your contract carefully before you sign anything. And if you are ready to get the process started like I am, don't forget to go to myFICO to get the right score for your credit goal, including FICO scores used for mortgages. So as always, guys, thank you for watching. And don't forget to hit the Subscribe button or to go to for more, and to come back every Monday, Tuesday, and Thursday for new and awesome videos. Goodbye.