1. Figure Out How Much You Can Spend on a Home
Before you start looking at homes, determine how much you can realistically afford. Consider your income, monthly expenses, and any other financial obligations. Many companies offer an online mortgage calculator, which can help estimate what your monthly payments might look like at different price points. This may also help you understand how much you may need from a mortgage loan.
2. Determine Your Debt-to-Income Ratio
Your lender is going to want to calculate your debt-to-income ratio (DTI) as part of their mortgage qualification criteria. A DTI ratio compares your total debts to your total income each month. This helps lenders evaluate how much money is available in your monthly budget to pay off your loan.
To calculate your DTI, add up your minimum recurring monthly debt payments each month. This may include items like credit card payments or student loans. It does not include things that are not reported on your credit report, like utilities, your cell phone bill, subscriptions, and other monthly budget expenses. Divide your total monthly debt payments by your gross monthly income. Generally, lenders are looking for a ratio no higher than 45%, but some may allow something higher depending on the loan you are seeking.
To improve your debt-to-income ratio, you can consider paying off existing debts and remember to disclose all income types (like pensions, part-time jobs, alimony or child support, rental income, and more). It's important to assess your current financial situation and create a plan that works best for you.
3. Check Your Credit Score and Credit Report
Your credit score and history play a significant role in mortgage approval and the interest rate you'll receive. Most loans will require a good credit score of at least 600 to 700, but there are some programs that will accept a lower score based on your situation. It’s important to discuss this with your lender as you could end up paying a higher interest rate or being subject to other fees with a lower score.
In addition to checking your credit score, you should also review your credit report. Free credit reports are available every 12 months from the three major credit bureaus. Credit Union 1 members have free access to Credit Score by SavvyMoney through Digital Banking, which offers insights into credit progress as well as financial education content. Once you’ve received this report, look for any errors such as incorrect account information. Since your credit report factors into your credit score, it’s critical to make sure it’s accurate before preparing to apply for a mortgage.
4. Meet All Minimum Mortgage Requirements
It’s a good idea to familiarize yourself with the specific requirements of the type of mortgage you are seeking. Different loan programs have different criteria regarding down payments, income verification, and credit scores. For example, the requirements for a conventional loan may be different than the requirements for a Federal Housing Administration (FHA) loan. At minimum, lenders want to see that you have a history of good credit, a low DTI ratio, steady income, and consistent employment.
5. Gather the Required Documents
Before the loan approval process begins, it’s important to be ready with all the required documentation. Mortgage loan applicants can streamline this ahead of time by gathering all the information they may need prior to choosing a loan. This paperwork includes, but is not limited to:
- Identification
- Proof of Income
- Employment Verification
- Proof of Assets
Credit Union 1 has mortgage resources, including a step-by-step walkthrough of the mortgage loan process, a mortgage calculator, and more. Plus, our team members are available to help you understand the home-buying process once you begin an application.