So you want to buy a home. . . it’s the American dream, after all, isn’t it?
Unfortunately there will always be one thing standing between you and your dream home—financing. And yes, getting pre-approved for a home loan may seem overwhelming, but it doesn’t have to be if you follow these three tips to prepare yourself financially.
Know Your Personal Credit Score
Do you know what your number is? You’ve probably seen ads on TV about keeping track of your credit, and as cheesy as they usually seem, it’s true—you really do need to know your credit score!
Credit plays a huge role in your everyday life. It’s taken into consideration when applying for car loans, credit cards, insurance, renting and in some cases employment. When it comes to financing a home, a credit score of 680 or above will help you get lower interest rates and possibly qualify for a higher mortgage.
(Quick tip: you can check your credit score online for under $20. Simply search on Google for “Free Credit Report” in quotes.)
Lower Your Total Debt
In addition to your credit score, mortgage lenders look at how much total debt you have, including credit cards, car loans, student loans, mortgages and any other debt.
During the loan pre-approval process your monthly debt payments will be totaled and divided by your monthly income. This gives lenders your debt to income ratio, commonly referred to as “DTI”.
For example, if your total monthly debt payments (not counting rent) is $1,200 and your total monthly income is $3,000 then you would have a “DTI” of 40%.
That’s $1,200 ÷ $3,000 = .4 or 40%.
The goal is to keep your DTI under 50%. In order to do this you may have to decrease your debt (pay stuff off) and/or increase your income. Remember. . . when you apply for a home loan, the lender will also add the new monthly mortgage payment to your current monthly debt—and that DTI still needs to be under 50%.
Keep Your Current Job
Finally, try not to get fired—banks and brokers don’t like handing out big loans to the unemployed! If you’re thinking about switching jobs, it will generally be less of a hassle to do it after you move since having a two-year work history is very helpful when applying for a mortgage.
Don’t worry too much if you haven’t been employed at your current job for that long; there are lenders who will include previous employment, especially if it was in the same field.
Those of you who are self-employed can qualify to buy a home too. The lender will at least require the last two years of tax returns, however, so it goes without saying. . . keep your taxes up-to-date!
Whether you’re looking to buy a home next week, next year, or ten years down the road, I guarantee that following these three tips is the best way to simplify the pre-approval process and get pre-approved as quickly as possible.
Peter Stewart is a licensed real estate broker in Portland, Oregon as well as a frequent contributing writer for OHM. Please don't hesitate to contact him with any questions you may have about buying or selling a home in the Portland area.