Are you ready to move out from your cramped apartment or out from your parent’s house? Well, before you start scouring for open houses, think about how you are going to pay for your first house. Chances are you are going to need a mortgage and unfortunately they don’t just hand those out. We are going to go over the different things you will need in order to please the lenders to entrust you with a large pile of cash – and what to do if you have not covered these bases yet. So how do you go about getting a mortgage?
1.A Good Credit Score
The first thing a mortgage lender will do is check your credit score to examine whether you are a low or high-risk borrower. The higher your credit score the better your odds are of getting approved for a loan. Since the perfect score of 850 is only achieved by a select few (0.5%) mortgage lenders look for scores around the 760-700 mark. This is considered to be the best range from a mortgage lender’s perspective, meaning you have better chances to get the best interest rates available. A fair credit score falls between 699-650. If you have a few hiccups on your credit history ( late credit card payments, unpaid medical bills) your score could fall below 650. If you are stuck in this situation you will most likely get turned away until you mend your credit. However, if you qualify for a Federal Housing Administration Loan, you are only required to have a minimum credit score of 580. A good way to check your credit score for free is to check Credit Karma.
2. Substantial & Stable Income
To qualify for a home loan, your job’s income must be high enough to offset your debts. How much income you need to get a mortgage boils down to your debt-to-income ratio. This figure compares your earnings to your outstanding debts. To calculate this ratio, figure out how much you’re paying in debt per month and divide that amount by your monthly income. Since you don’t own a house yet you want you DTI ratio to stay well below the recommended 36% since buying a home is going to raise you DTI through the roof.
So for example lets say you make $5,000 a month and pay $250 in debts. Now let’s assume you have around $30,000 for a down payment and can get a 30-year mortgage at a fixed interest rate of 5%. This will put you in the ballpark of affording a home worth $243,100.
3. A Sufficient Down Payment
Most mortgage lenders like to see that you have enough in the bank to make a 20% down payment, which is $50,000 on a $250,000 home. So if you don’t have that much saved up, it is time to start pinching some pennies! However, there are other options out there.
FHA- backed loans let borrowers make down payments as low as 3.5%. If you have served in the military, the Department of Veterans Affairs loans require no down paymenr at all. Ony eligible for a convential loan? Expect to need at least a 10% downpayment. However, if you put anything less than 20% down on a convential loan, you will need to pay private mortgage insurance. This has a monthly premium that can range anywhere from 0.3%- 1.5% of the total loan amount.
Do you think you are ready to buy your first home?
