Home buying is a roller coaster of emotions. There is excitement over the thought of having a space that is yours, all yours. There is hope for the future, and all that you will do in your own home. There is fun in house hunting. Then there is the stress and anxiety of financing your new home.
Because seeing happy homeowners is our goal, we wanted to help you develop a strategy to achieve your financial goals.
ONE| STEADY INCOME
Lenders like to see consistency. This is because they want to know you’re going to make good on your loan and pay your payments on time. They look for a steady income history as a part of their initial application process. If you are self employed then a lender will look for two years of your tax returns to get a good idea of your income.
TWO| CREDIT SCORE
Second big factor in qualifying for a home loan is your Credit Score. Your Credit Score is essentially a snap shot of your credit files to show how financially risky you are to a lender. In general your Credit Score is based off of payment history, amount owed, length of history, new credit, and types of credit used.
Many people find this to be the area that holds them back in the home buying world the most. If buying a home in the next 6 months is on your to do list, begin now focusing on timely payments, and not extending your credit any further.
For example. You have 4 credit cards all with balances on them. Make it your goal to:
1. NOT open any more cards, no matter how tempting that store card sounds today the %40 you save one day will not be worth putting off becoming a home owner.
2. Make timely payments of at least the minimum balance, ideally more to reduce the balance. Consistency in your payments will reflect on your credit score.
THREE| DEBT TO INCOME RATIO
A lender is going to add up all your monthly minimum payments and compare that to your monthly income and then determine how much loan you qualify for.
36% is usually the ratio a lender will use. This means that your revolving payments (credit cards, car payments, child support) plus your housing expenses (Mortgage payment, insurance, and taxes) can not exceed 36% of your gross income.
EXAMPLE: Gross Income – $4000 /month
36% of $4000 = $1440
Monthly credit card payment – $100
Car Payment – $400
Total revolving payments = $500
$1440 – $500 = $940
This means that your lender is most likely going to require that your monthly housing expenses (payment, insurance, and taxes) be $940 or less.
FOUR| DOWN PAYMENT
It was commonly known that you had to have 20% down to buy a house, and while that is always best case scenario, it is somewhat of a misconception now. There are many loans available that do not require 20% down. Some requiring as low as 3.5%!! This is good in that you can own a home even if you don’t have a massive savings or you didn’t get an unexpected inheritance. When putting less down on a house though you become “risky” to your lender and therefore they may require more of you in underwriting. When putting less than 20% down on a home you will be required to pay mortgage insurance. This is how the lender protects their investment.
FIVE| BE SMART!
During the time that you are hoping, planning, and preparing to apply for a home loan, BE SMART with your finances.
DON’T sign as a cosigner on your cousin’s car loan to help them out, even if you’re not the one planning to make the payments!
DON’T forget to make your payments!! Not making the payments you have now looks questionable to lenders.
DON’T apply for more credit! Just don’t do it!
DON’T close your credit card. Length of credit history is actually a good thing!
Watch the ratio of available credit on your credit cards to used credit. Keeping that ratio below 25% is ideal!
We can give you great ideas to improve your chances of qualifying for your home, but talking with a lender will ultimately be your best decision. They can help you today set up a plan to be financially fit in 6 months or 12 months to buy your home! And if you don’t know where to start we have lenders that we trust to help you along this exciting journey!