Are you thinking about buying your first home, but wonder if you are ready? Mortgage lenders will look at five primary factors to help them decide if they want to lend you money to buy that perfect home.
1. Down Payment
The first thing that the lender will look at is your available cash. They want to know that you are ready to make an investment in the property along with them. Generally, lenders want to see that you have 20 percent down. In fact, they will often give you a better mortgage rate if you can. They also may not require you to buy private mortgage insurance. If you have at least ten percent saved up, then they may still loan you the money, but will require that you buy the private mortgage insurance. Less than ten percent, you probably need to work for a while on saving up cash.
2. Pre-tax Income
As a general rule, lenders do not want you to spend any more than 28 percent of your income before taxes on your mortgage and insurance on the house. Look at your paycheck stubs, your gross earnings will be listed. Multiply that gross by the number of times you get paid a year. That gives you your gross income for the year. Then figure out 28 percent of that amount. That is the amount lenders feel you can afford to spend each month. The whole amount will not be your mortgage as you need to pay the taxes and insurance.
3. Employment Status
Lenders will want to see that you have a stable employment history. Generally, they want to know that you have been with the same employer for at least two years. As money becomes tighter, they want even a longer employment history. If the company you are working for has changed names, be prepared to show that fact. If you have not been with the same employer for two years, they may ask about whether you have been employed in similar work for the last 2 years. In the case where more than one person is buying the home, this will apply to both partners. If you are self-employed, talk to the lender about how to prove your employment history.
4. Debt Load
Remember your gross income that you figured earlier. Lenders do not want to see a person carry more than 12 percent of that figure in other debt. If you have more debt than that, then work on paying it off. Most people find it easiest to pay off their debt from smallest to largest. Look for other things that you can sell to pay off the debt quickly. Furthermore, look for ways to increase your income.
5. Credit Score
Check your credit score. Make sure and check for inaccuracies. If you find any, then get those cleared up quickly. Some people may find that they have forgotten little debts over time that can be cleared up quickly. Generally, you need a credit score over 720.
Owning your own home can be a great adventure. Lenders will look at these factors to determine if you are ready. When you are ready, they will gladly lend you the money. Until then, take steps to get ready to buy your first home.
This post was written by Alexis Willis, who enjoys writing about the mortgage process for www.iowacityrealestate.com.