Dear Liz: My wife and I are considering buying a home for the first time. We’re planning to switch our accounts from our bank to a credit union. We’re in the midst of receiving a bad report from the bank, and that’s why we want to change. But is that a wise choice when we want to buy a home? Also, what options do we have for a mortgage when we don’t have any money for a down payment? Are we locked into an FHA loan, or are there other choices? We are middle-class people making an average of $40,000 a year with no kids and OK credit scores.
Answer: If you don’t have a down payment saved, you aren’t ready to be homeowners.
Homeownership is expensive, with lots of unexpected costs constantly popping up. Some are relatively minor, like having to replace a worn-out appliance, while others are major, such as having to replace a furnace or a roof.
That’s why homeownership isn’t a good idea for people who aren’t already in the habit of living below their means and saving a decent proportion of their incomes.
Take the next year or so to tweak your spending and save up a down payment. You’ll need at least a 3.5% down payment to qualify for an FHA loan. A bigger down payment will give you more loan options and won’t leave you upside down on your home from the first day. A 20% down payment is often best, since you can avoid private mortgage insurance.
A year also will give you time to polish those credit scores from “OK” to “good.” The higher your scores, the better the interest rate you’ll receive.
But the fact that you’re receiving a “bad report” from your bank is worrisome. You don’t specify what happened, but anything that could be reported to the credit bureaus, such as a missed credit card payment, could cause major damage to your scores. Simply switching to another institution won’t prevent that. And if you’ve piled up a bunch of bounced checks, your credit reports may not be damaged but you could find it difficult to open new accounts at other financial institutions.
Whatever happened, you should try to straighten it out with the bank before you decamp, even if you ultimately decide to switch accounts.