Been checking out the housing market and thinking about buying a home, but not sure if you can snag a mortgage? Just taking a quick look at your finances can help you figure out where you’re at.
Getting a mortgage really comes down to four main things: your credit history, how much money you’ve got coming in, your savings, and any assets you can put up as collateral. By checking these off, you can see how ready you are to own a home. Plus, these four Cs can highlight what you might need to work on and guide you as you get set to buy.
When you’re figuring out if you can get a mortgage, lenders are gonna take a close look at:
1. Understanding Credit History:
How likely are you to pay back your loan? How you’ve handled borrowing in the past helps mortgage lenders figure out if they can trust you to pay your debts. They’ll look at two main things: your FICO score and your credit report history.
FICO score. Your credit score is basically a number that shows how trustworthy you are as a borrower. FICO scores usually range from 300 to 850. If you’ve got a score of 740 or above, you can snag some great interest rates; most loan programs want at least a 580, but there are always exceptions to the rule if you are willing to pay the extra cost for the added risk the lender will takes when lending to lower FICO scores. You can bump up your score by working on a few key things:
- Paying your bills on time
- Paying down what you owe
- Building a longer credit history
- Keeping new accounts to a minimum
- Having a good mix of different types of credit
Credit report. Your credit report is a detailed look at what makes up your credit score. Bad stuff sticks around for 7 to 10 years, but good stuff only shows up for as long as those accounts are open. It’s a good idea to check your credit report now and then to make sure everything’s accurate, including:
- Your personal info
- Payment history
- Employers
- Credit inquiries
- Bankruptcies
- Judgments
2. Capacity:
Can you swing a mortgage payment? Lenders figure this out by looking at your debt-to-income (DTI) ratio. Basically, they add up all your monthly debt payments and the new mortgage payment, then divide that by your gross monthly income.
This ratio can really make or break your chance to buy a home since it affects how much you can borrow and whether you can pay it back. Most lenders have strict limits on how high your DTI can be, and those limits can change. Generally, you want your DTI to be 45% or less, which means you should be spending less than half of your monthly income on debt.
You can boost your DTI by paying off some debts before you apply for a home loan, but watch out for closing any accounts, as that could slightly hurt your score. Increasing your income can also help out a lot.
3. Capital:
What resources can you use to cover your mortgage? Having a steady income is super important, but lenders also want to see that you’ve got other assets you can tap into. Your capital is basically everything you can quickly access — cash, properties, retirement accounts, other investments, and anything else you could sell for quick cash.
Building up your savings before you buy a house is key. The more you save, the better off you’ll be — financially and practically. At the very least, you should aim for:
Down payment. Typically, down payments are between 3% and 20% of the home's price, but some loan options don’t require any down payment at all. Putting down more upfront might get you a better interest rate, so it’s definitely worth saving up.
Reserve funds. Once you own a home, you’ll need to handle annual maintenance costs — usually around 1% of the home price — plus any surprises that pop up, all while keeping up with your monthly mortgage payment. Make sure you’ve got at least 2 months’ worth of reserve cash saved up before you close the deal.
4. Collateral:
What's securing your loan? Basically, it's your home that’s on the line if you can’t pay your mortgage. Lenders want to make sure your place is worth enough to cover the loan amount.
Before you close on a house, you'll need to get it appraised to prove its value lines up with what you're borrowing. Your loan-to-value ratio—how much you’re borrowing compared to the home's value—helps lenders figure out how much risk they're taking. This is where putting down a bigger down payment can really help.
Just a heads-up, the appraisal is not the same as an inspection. The appraisal is just to check the market value of the house. If you want to see how good of shape it's in, you’ll need an inspection, and your realtor can help with that.
By now, you probably have a decent sense of whether you’re ready to take on a home loan. The next step is to get pre-qualified. And even if you’re not quite ready yet, we can help you come up with a plan to get you there!
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