Thinking about buying your first home? Congratulations! Open Mortgage can work with you every step of this empowering and life-changing process.
If you’re like most people, you’ll need a mortgage to purchase your first home. A mortgage is a loan from a bank or mortgage lender that helps you finance your home purchase.
But before you start searching online home listings and attending open houses, there are three steps you can take to ensure you’ll qualify for a mortgage and make the home-buying process easier.
Check your credit report and review your monthly expenses
To obtain a mortgage, you’ll need good credit. So your first step should be to obtain a credit report, analyze your monthly expenditures, and resolve any delinquent accounts.
You can also check your credit score from one of the free resources online. A credit score of 620 is generally considered the minimum needed to obtain a mortgage, while 760 (and above) can provide the best terms and rates. If you have a credit score lower than 620, some options may still be available, but it’s recommended that you begin the process of improving your credit before applying for a mortgage.
It’s also strongly recommended that you don’t open new credit accounts or make large purchases using credit cards within several months of applying for a mortgage. This can lower your credit score and cause you to receive a higher mortgage interest rate.
Determine the monthly mortgage payment you can afford
Once you’ve established that your credit score is high enough to obtain a mortgage, you should determine the monthly mortgage payment you can afford.
Most banks and lenders determine the maximum payment you can qualify for using your debt-to-income ratio (DTI): the percentage achieved by dividing your monthly liabilities by your gross monthly income.
For example, if your pay stubs/tax returns show that you make $120,000 per year, this means you make $10,000 per month. If you currently have $1,500 per month of liabilities, your DTI without having a house payment ($1,500 / $10,000) would be 15%.
Most banks and lenders allow a borrower to achieve have a maximum DTI of 43%, so the maximum mortgage payment a borrower who makes $10,000 per month and has a current DTI of 15% could afford (including taxes and insurance) is around $2,800 per month. You’ll still need to determine if that amount fits your budget.
Document your employment history, rental history and assets
After establishing your credit rating and determining your maximum monthly mortgage payment, you should make sure you have a verifiable employment history, rental history, and assets.
Banks and mortgage lenders require you to verify your last 24 months of employment with minimal gaps in unemployment. School and college time can count as employment. You’ll also be required to document your last 12 months of housing history, and your landlord can provide you with a verification of rent.
Banks and mortgage lenders also want to ensure first-time homebuyers have actually saved money for any down payment or closing funds over time (rather than a friend or family member dumping funds into your account immediately before you apply for a mortgage) — and you should be able document that money in your bank account has been available for at least two months.
Considering these steps will make buying your first home easier
Since the 2008 housing crisis, banks and lenders have dramatically raised lending criteria, but individuals with good credit ratings, DTI’s under 43%, and documented rental history and assets have a good opportunity to take the journey into home ownership.
For more information on the mortgage process, please contact me today!