Preparing to Buy

Once you decide to buy a new home, the first thing you’ll need to do is check your credit history. This involves pulling credit reports from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) to better understand your credit score.

Your credit score determines whether you’re eligible for a mortgage, and it influences your mortgage rate. The higher your score, the lower your rate.

Most mortgage programs require a minimum credit score between 580 and 620.

Ideally, you should check your credit history at least six to 12 months before applying for a mortgage loan. This allows time to improve a low credit score, if necessary.

You should also check your credit reports for accuracy and dispute any errors, especially negative errors that decrease your score.

To get your credit file, contact each of the three bureaus separately, or order all three copies from AnnualCreditReport.com. Normally you’re entitled to one free credit report each year from each of the bureaus. During the pandemic, AnnualCreditReport.com has been allowing one credit report each week from each bureau.

Your debt-to-income ratio (DTI) shows the percentage of your monthly gross income that goes toward debt repayment. Mortgage lenders use DTI to see how big a house payment you could afford.

Typically, lenders prefer a DTI ratio that’s no higher than 36% to 43%, depending on the mortgage program.

For example, let’s say you have a gross monthly income of $4,000:

• Your monthly debt payments (including a future mortgage payment) shouldn’t exceed $1,720

• Your DTI is 43% ($1,720 / $4,000 = 0.43)

Some mortgage lenders allow a higher debt-to-income ratio, but only when a borrower has “compensating factors” such as a high credit score or a large cash reserve. In other words, a strong credit score or a healthy savings account might compensate for a high DTI.

To lower your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans.

You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.

Unless you have VA or USDA loan eligibility, you’ll need to make a down payment. Conventional loans require at least 3% to 5% down, and an FHA loan will need at least 3.5% down.

So if the purchase price for your first home is $400,000, you may need at least $12,000 to $20,000 as a down payment.

You’re also responsible for closing costs — which are roughly 2% to 5% of the loan amount (or $5,000-$15,000 on a $300,000 loan).

When applying for a mortgage loan, your lender will ask for copies of your bank statements to confirm you have enough cash reserves for your down payment and closing costs.

If you don’t have enough cash, some mortgage programs allow borrowers to use gift funds to cover all or a percentage of their mortgage-related expenses.

Even though your lender will discuss different types of mortgages, do your own research before meeting with the loan officer.

Once you’re ready, the home buying process is going to move fast. It can be difficult to digest everything your lender says — and you might not feel like you have enough time to explore all financing options.

If you settle for the first loan you’re offered, you might miss out on lower rates or a more affordable loan program.

So take your time and educate yourself on different types of loans. Think about what you really want in a mortgage. Is it:

• The lowest down payment?

• The lowest possible monthly mortgage payment?

• Avoiding private mortgage insurance?

• Paying off your loan in the shortest time possible?

All these things are possible. A loan officer can help you find the right match when you know what your priorities are.

Knowledge is the best tool to make an informed decision and choose the best home loan for your situation.

Our partnering Real Estate brokerage is Kingdom Legacy Real Estate who also partners with the various grants mentioned within this website. 

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