Can I Commit to Buying?

Am I Ready to Commit?

Buying a house is a major commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner. Let’s take a look at some of the factors your lender will consider when they look at your loan application.

Income And Employment Status

Your lender won’t just want to see how much money you make, they’re going to want to see a history of your income to make sure your income source is stable and reliable. Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on the payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns as well as any other documents the lender requests if you’re self-employed.

Debt-To-Income Ratio

Debt-to-income ratio is another financial instrument lenders use to evaluate your loan application. DTI helps your lender see how much of your monthly income is already going to debt so they can evaluate the amount of mortgage debt you can take on.

DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.

It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a DTI of 50% or less to qualify for a mortgage, although this number varies based on your lender, loan type, and other factors.

Liquid Assets

Buying a home with no money down is possible but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan. The amount of money you’ll need to save depends on your loan type and how much money you borrow.

Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true – you can buy a home with as little as 3% down (0% if you are a veteran). However, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance. PMI protects your lender if you default on your loan.

You’ll also need to pay for closing costs before you move into your new home. Closing costs are fees that go to your lender in exchange for creating your loan. The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to save 3% – 6% of your home’s value for closing costs.

Credit Health

Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to.

Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.

Willingness To Live In One Place

When you own a home, it’s more difficult to move than when you lease. In many cases, you’ll need to sell your home first, which can take a long time. Decide whether you’re ready to live in the area you are considering buying in for at least a few years. Consider your career goals, family obligations, and more. Each of these factors will play major roles in the type of home you buy and where you buy it.