For some, renting a home was an easy process. Landlords may verify present income but then pass on credit checks and deposits. Buying a home is a completely different experience, and knowing the requirements before stepping foot in a lender's office can help ensure a smooth and easy deal.
Affording a Home
Buying a house sounds like a nice idea, and you may honestly believe you are able to afford a home loan. However, lenders are responsible for assessing your finances and determining whether you meet the income requirements to buy a home. Lenders base affordability on a ratio, and ideally, your mortgage payments should stay around 28 percent of your gross monthly income, according to the Home Loan Learning Center. For example, if you earn $2,500 monthly, lenders prefer your home loan payment to remain around $700.
Mortgage lenders require an overall fair/good credit history to qualify for a mortgage loan. Credit scores range from 300 to 850, and while you don't need a perfect score to buy a home, prime lenders may reject your application if your score falls below 680. On the other hand, Federal Housing Administration mortgage lenders do accept applicants with scores as low as 620. But if you want the best rate and terms on the loan, aim for a higher score. Payment history and checking your credit report for errors help boost a low score.
Paying Down Debts
Debt-free isn't a requirement for a mortgage loan. But the fewer debts you hold, the better. There are several good reasons to pay down debt before buying a home. First, paying down debt reduces your debt-to-income ratio, and a low debt ratio helps you get a better interest rate on the mortgage loan. Secondly, paying off a car loan or credit card debt first means you're able to spend more on your mortgage loan and thus qualify for a larger home, if approved by your mortgage lender.
Mortgage Down Payments
Learning the specifics of down payments requires speaking with a broker or loan officer because different loan programs have different minimums. A 20 percent down payment eliminates mortgage insurance (required on mortgages without 20 percent equity). But if you can't afford this expense, talk to your lender about smaller down payments. Look into FHA home loans that require less than 5 percent down.