3 Steps To Qualify To Buy A Home
How do you know if you can buy a house?
A lender—the person/group/institution that lends you money— wants to make sure they’re handing over their dollars to someone they know will pay them back, and do it on time. They look very carefully at your financial picture to determine your eligibility.
What are they looking for? Here are the 3 main factors they consider. Make sure you have these down to secure that loan!
credit scores of 580 or higher
Credit scores are seen as a marker of how you spend your money or rather, repay borrowed money. Credit score requirements may differ by lending institutions, but here are some general guidelines. Lenders want you to have a minimum credit score of 580 for an FHA loan or a minimum score of 620 for a conventional loan. Typically scores of 740 or higher get the lowest interest rates, so take the time to work on your credit if you need to!
2 years of job history in the same job/field of work
To a lender, keeping a steady job means you’ll be keeping a steady flow of income that can go towards paying off your house. Lenders want to see that you have worked for at least 2 years in the same job or in a similar field. Here are some other situations that may apply to you:
Do you have gaps in your employment? You will need to show prior 2 year work history and you may need to be at your current job for at least 6 months.
Did you recently graduate from school? Good news—education can count as work history!
Are you self-employed? You will need to have had your business for at least 2 years with filed tax returns.
debt to income ratio should not exceed 45%
Lastly, lenders commonly do not want your debt to income ratio to exceed 45%. There’s an easy calculation to figure this out. Let’s start with some definitions.
debt: all your minimum monthly payments such as credit card payments, car payments, student loans, etc. Think: anything that would show up on a credit report.
house payment: this is your future monthly house payment. It will include principal, interest, taxes, and insurance. You can use this calculation to figure out the maximum that payment can be.
gross monthly income: your income per month before taxes.
alright, get out your calculator!
debt to income ratio* = (debt + house payment ) / gross monthly income
*remember, this number should not exceed 0.45
OR calculate your max house payment:
max house payment = (0.45 * gross monthly income) - debt
let’s try it with an example:
minimum credit card payment: $60
minimum car payment: $300
house payment: $1,700
gross monthly income: $5,500
debt to income ratio = ($300 + $60) + ($1,700) / ($5,500) = 0.37 (less than 0.45, perfect!)
OR
max house payment = (0.45)($5,5000) - ($300 + $60)
—->house payment maximum = $2,115
