DEPENDABLE INCOME
Regular and dependable income is critical to qualifying for a mortgage. A home is a longterm investment, so lenders take a close look at your income and employment history.
Income that doesn’t support a mortgage payment can hurt your chances to qualify for a mortgage. Frequent job changes suggest instability and can also prevent a lender from approving a home loan. If you’re new to working and still aren’t earning enough, you might need to wait before pursuing homeownership.
GOOD CREDIT SCORE
Your credit score is a three-digit number that represents your creditworthiness. Credit scores typically range from 350 to 850 with higher numbers representing better credit. Your credit score is calculated with information from your credit report, including payment history, debt and the length of your credit history.
Having a good credit score is a key piece to being financially stable enough to buy a home. Also, those with high credit scores typically get better terms for their home loan, which can save thousands of dollars over the life of a mortgage. Having an excellent credit score puts you in a great position to become a homeowner.
If you have poor or fair credit, you need to evaluate your credit score and may need to work on improving it before you’re ready to buy a house. Look for items that might be negatively impacting your score, such as too many hard credit inquiries, too short of credit history, late payments and using too much of your available credit.
If you have a low credit score, you’ll have difficulty qualifying for a mortgage. Some affordable home lending products, FHA loans and VA loans may have lower credit score requirements than conventional mortgages, which could help you qualify for a loan even with less-than-perfect credit.
DOWN PAYMENT
A down payment is an initial partial payment you make when you purchase a house. The larger the down payment, the more likely you may be approved for a mortgage.
If you don’t have enough available for a large down payment, you might be able to be gifted money to put towards it. If a large down payment still sounds steep, you might have other options. Speak to HUD Certified Housing Counseling Agency, and/or your lender about state and local homebuyer assistance programs that subsidize a portion of the required down payment.
Also, look into lower down payment products such as FHA or some Conventional loans that may offer less than 5% down payment options in some cases. The VA Home Loan are for eligible veterans and may not require down payment.
Here are some steps you can take before determining how much home you can afford and how much you can put down on a house:
• Evaluate Your Budget
Review your current budget to determine how much you can afford, and how much you want to spend. Ask your lender about their requirements for how much of your pre-tax income you should spend on housing payments and other debts.
• Assess Your Home Needs
Ask yourself what you really need from your home. For example, do you plan to start a family? Do you have teenagers who will soon be moving out? These are all important considerations. You need to anticipate not only the stage of life you’re in right now, but also what stage you’ll be entering while in your home.
• Consider Your Options
After evaluating your budget and what you need from your home, it’s time to consider all your options. You might need to look for a loan option that allows a smaller down payment, or you might want to give yourself more time to save up for a larger down payment on a house.
Benefits Of Putting 20% Or More Down
If you’re able to do so, you may want to consider putting down a payment that’s 20% or more. Here are some of the benefits:
• Lower monthly payment due to no mortgage insurance and smaller loan amount
• Less interest paid over the life of the loan
• More flexibility if you need to sell on short notice
• Smaller mortgage payments
A down payment on a house also protects you as the buyer. If you want to sell your home and the market drops, you might owe more on your property than it’s worth. If you made a larger down payment when you purchased your house you may break even, or possibly make money when you sell.
DEBT-TO-INCOME RATIO
Lenders look at your debt and your income to determine if you’ll be able to manage your monthly mortgage payments without issues. Your debt-to-income ratio (DTI) is the percentage of your monthly debt compared to your monthly gross income. Credit card payments and loan payments and the payments on your new home are examples of the debts lenders include in your DTI calculations.
The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages. This ratio determines if the borrower can make their payments each month. Some lenders may be more lenient or rigid, depending on the real estate market and general economic conditions. If you have limited debt compared to your income, you’ve fulfilled one crucial requirement for being ready to buy a house. If you’re still working on paying off debts like student loans or credit card payments, it may be worth focusing on reducing your DTI before considering buying a home.
ADDITIONAL HOME BUYING COSTS
But buying a home carries additional costs besides down payment and monthly mortgage payments, you need to factor into your budget. Some of these costs are one-time expenses that you won’t have to think about again, while others need to be paid regularly.
The most common home buying costs you need to prepare for include:
• Closing costs. You pay these costs when you close on your home. Common closing costs include fees for the appraisal, inspection, title search and a credit check. Your lender will give you an estimate of closing costs soon after you apply for a mortgage. To reduce closing costs, you may be able to negotiate to have the seller pay some or all of them.
• Private Mortgage Insurance (PMI). Private mortgage insurance is a monthly expense that protects your lender if you default on your loan. Having to pay PMI depends on the amount of your down payment. Typically, if you put 20% or more down, you don’t need to pay PMI.
• Property taxes. When you close on a new house, you typically need to pay property taxes. This amount is from the date you close through the end of the tax year. Most lenders roll your property taxes into your monthly mortgage payment and hold your money in escrow until it’s time to pay property taxes to the county where you live.
• Homeowners Insurance. Most lenders require you to have an insurance policy that protects your property against loss from things like theft and natural disasters. Typically, your annual premium is spread out over 12 months and included as part of your monthly mortgage payment. Similar to property taxes, your lender then pays your annual insurance premium on your behalf using the funds held in your escrow account.
ARE YOU READY TO BUY A HOUSE?
• Homeowners Association fees. Houses located in specific neighborhoods or gated communities sometimes have homeowner’s associations (HOA). Almost all condominiums and townhouses have HOAs. When you belong to an HOA, you pay fees for the services and amenities the association provides. The amount and frequency of HOA payments varies.
SAVINGS FOR HOME MAINTENANCE AND REPAIRS
Owning a home means you’ll have to maintain your property. While you may have enough to purchase a home, you’ll need to make sure you can also cover the costs of owning one. Many real estate agents and insurance companies recommend following the one-percent rule. Tuck away one percent of the value of the home you intend to buy each year to cover maintenance and unexpected repairs.
YOU SHOULD PROBABLY DELAY BUYING A HOME IF:
• Have significant debt
• Don’t want to be tied down
• Have a low credit score
• Monthly mortgage payments will spread your wallet thin
• You are reacting to pressure from family and friends
Conclusion
If you can afford to do it. But “afford” isn’t as simple as what’s in your bank account right now. A host of other financial and lifestyle considerations should figure into your calculations. After careful analysis of the topics above, and you can confirm that you are in good standing, then you are ready.
