So you’re ready to buy a home. While that’s an exciting prospect, it can also be quite scary. It’s a big decision, and unlike many major purchases, there are quite a few factors involved in obtaining the loan you need to buy a house. Let’s start with the two things potential lenders look at when you apply.
The most important factor is your debt-to-income ratio (DTI). DTI is the percentage of your income that goes to your monthly debts, and it shows potential lenders how much you can borrow to buy a home. You may be surprised to discover that this is actually more important than your credit score.
Your DTI is your monthly debt divided by your gross (also known as pre-tax) income. The most attractive DTI for lenders is around 36% or less. A score above 43% will cause most lenders to decline the loan. Depending on the lender, your DTI can exclude your monthly expenses like food, utilities, and transportation, among others. This may cause you to be approved for more than you can pay, so keep this in mind when you’re calculating how much you can afford to pay on a monthly basis.
When you’re applying for a loan, lenders will pull your credit report and use your credit score(s) to help decide whether and how much to lend to you. Credit scores are determined by your payment history, the number and type of credit accounts you have, your used vs. available credit, and the length of your credit history. Minimum credit requirements vary from lender to lender, but it’s best to know what your score is going into this process.
How to Maximize Your Ability to Buy a Home
If you’re unsure of your credit score or DTI, there are a few things you can do to increase your chances of getting approved for a home loan.
Consolidate your current loans
One way to help your DTI is to consolidate your current loans. In other words, the fewer payments you make to fewer lenders, the better things will look. If you have three credit cards, for example, you can consolidate them into a single card with a single payment. It works for other loans, too — you can consolidate student debt, for example. It may be difficult to pull off based on your credit score, but it’s a smart step.
Pay off or pay down your debt
Another step to take is to reduce your debt by either paying it off entirely or, more realistically, paying it down. This can help decrease your DTI and make your financial future look more attractive. For example, paying off some credit card debt is a logical step to take.
Bear in mind that this isn’t guaranteed to work across the board. Some lenders may want you to pay it off, while others might be fine with your DTI as-is and would simply require a larger down payment.
There is no hard and fast rule when it comes to debt. You should decide what is best for you and your financial situation as well as what your lender requires. Don’t be afraid to ask these questions. A good lender will be willing and able to provide answers and options.
Repair your credit score
Take a thorough look at your credit report. By law, you’re allowed to get a report from the three major bureaus once a year. There is always a chance that you may have debts listed that aren’t yours, and that could be impacting your score. If there are errors, dispute them immediately as a way to repair it.
Make a good down payment
You’re probably familiar with the concept of a down payment. If not, it’s the amount of money you’re required to pay up front before you close on a mortgage. The usual cost is anywhere between 0% to 20% of the total. However, the National Association of Realtors reports that the median down payment for first-time buyers is 6%. Your rates may vary, but it’s something to keep in mind.
The best way to make sure the down payment is covered is to start saving now. In the end, you might wind up with more saved than is necessary, which is always a good thing.
Decide how much you can pay monthly
So what should you expect to pay on a monthly basis when you buy a house? We have a simple mortgage calculator that can help. While this is not a definite number, it will give you a good idea of what to expect. It’s also a way to figure out what might work best for you when it comes to loan options.
Putting It All Together
Once you’ve decided that you’re ready to apply for a home loan, you’ll need to gather the necessary documents. They include documents for the application itself, income verification, assets and debts, and finally credit verification. U.S. News and World Report has a comprehensive list here.
Trust The Home Loan Expert
For more than 10 years, the team at The Home Loan Expert has helped home buyers just like you to get the best possible loan rates across the country. We have years of experience streamlining and taking the stress out of the loan process.
Ready to start? Contact us today and let’s talk.