April marks National Financial Literacy Month, and there’s seldom (if ever) a time you’ll need to be more financially savvy than when you’re ready to buy a home. Whether you’re a first-time buyer or have been through the process before, purchasing the home of your dreams is a big decision.
While a lucky few can buy a home with cash, most of us must secure a mortgage loan from a lender. To make that happen, aside from a stable income, lenders consider the following three factors above all else.
“The Big 3” – What You’ll Need to Qualify for a Mortgage Loan
- An overall favorable credit history. Your credit report is one of the most important things lenders review during the loan underwriting process. Before allowing a lender to examine your credit score, self-check your credit report to ensure accuracy. If you notice errors, work to dispute them before applying for financing.
Aside from knowing your credit score, you’ll want to understand credit score ranges. Qualification criteria depend on the lender, but scores over 700 mean you’re in good shape. FHA loans tend to get approved with a score of around 580, but for other types of loans, below 680 means your options could be limited, or your interest rates could be higher. Even if your score is below average, the good news is you can take steps to improve it.
- Money to put down. The thought of a 20% down payment can seem unrealistic, but the good news is that very few lenders still ask for that amount at closing. In fact, the typical down payment for first-time buyers has ranged between 6 and 7% since 2018. Still, saving money for this venture is important, no matter how much or little you must put down. Be sure to research the various loan types available, especially if you are a first-time homebuyer. There is assistance provided by multiple entities, from local to state to federal, and from both the government and private sectors.
- A lower-end debt-to-income ratio. A lender determines your borrowing risk based on your debt-to-income ratio (DTI), the percentage of your gross monthly income devoted to debt repayment. To calculate your DTI, take your total monthly debt payments and divide that number by your gross monthly income. For example, a DTI ratio of 20% means that 20% of your monthly gross income goes to debt payments. A low DTI ratio, ideally lower than 36%, demonstrates a good balance between debt and income.
Before the house hunting begins, you’ll want to determine how much house you can afford and whether or not you’re ready to apply for a mortgage by evaluating your finances.
Continental Title Company takes pride in the great relationships we have with REALTORS and LENDERS. Contact one of our offices near you; not only will we help you find an agent you can trust, but we’ll also assist with your title and closing needs.