Buying your first home is one of your biggest life decisions, and it’s important to be prepared.
Here are some things you can do to get ready:
Make sure you have good credit
To secure a low interest rate on your first mortgage, you’re going to need good credit. This means you should always pay your bills on time, without exception. You can obtain a free credit report to analyze your monthly expenditures and resolve any delinquent accounts. We also recommend checking your credit score from a free resource online, as a 620 credit score is generally considered the minimum to obtain a mortgage.
If you’re struggling with poor credit and want to improve it, check out our video on easy ways to raise your credit score. We also strongly recommended that you don’t open any new credit accounts or make large purchases with 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.
Establish what you can afford
If your credit score is high enough to obtain a mortgage, determine the monthly mortgage payment you can afford. Most banks and lenders determine the maximum payment you can qualify for from your debt-to-income ratio (DTI): the percentage achieved by dividing your monthly liabilities (such as student / auto loans and credit cards) by your gross monthly income.
As an example, if your pay stubs or tax returns show you making $120,000 per year, this means you make $10,000 per month. If you have $1,500 per month of liabilities, your DTI without a house payment ($1,500 / $10,000) is 15%.
Most banks and lenders allow borrowers to have a maximum DTI of 43%, so the maximum mortgage payment for 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 need to determine what amount fits within your budget.
Gather your employment history and rental history
After establishing your credit rating and maximum monthly mortgage payment, 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 unemployment gaps. School and college can count as employment. You’ll also be required to document your last 12 months of housing history. Your landlord can provide this documentation.
Research the selling prices of homes in your area
While looking at homes online (and in person) is an exciting part of the buying process, we suggest doing this after establishing good credit and your maximum monthly mortgage payment. There are excellent home listing websites including Zillow.com and Realtor.com that can help you analyze home prices and features. We also suggest speaking with respected realtors in your area about your housing market’s condition, and your financial situation.
Think carefully about your goals and future before buying a home
Buying a house is an empowering part of the American dream, and an outstanding way to build wealth. But maintaining your home is labor-intensive, costly, and there’s no landlord to turn to for help. So think carefully about your long-term goals, family future, and career goals before beginning the homebuying process. If you have questions or are ready to take the next steps, please contact me today!