With very few exceptions, every single person who is now a proud homeowner used to be a renter. If you are a renter hoping to make the leap into home-ownership, this article is for you! Follow these seven steps, and you are on your way!
Odds are you are going to need a loan. Mortgage lenders are actually hoping they can lend you money. Their entire business model is built upon handing out loans and collecting interest payments. Before they do though, they need to assess how likely it will be that you will make your payments in a timely manner. The lower the risk to them, the more likely your application will be approved (and the better your interest rate will be on your loan). If the risk of nonpayment is too high, lenders will just say no.
So, how do you get a lender to say yes?
- Have a steady job
- Have a credit history
- Monitor your credit
- Make payments on-time
- Have a healthy debt-to-income ratio
- Have money in your savings account.
- Have a system that works for you to make yourself accountable.
- When you think you’re ready, talk to a reputable lender…and call me!
Let’s break these down individually.
Have a Steady Job – Lenders like to see at least two years of continuous employment. This shows income stability and an ability to continue making payments.
Credit History – If you have no credit history, lenders don’t have any records to pull that shows you are reliable at paying back your debts. Being debt-free is fantastic, but when you do decide to finance a car, your home, or any other large purchase the lender needs to have assurance that they will be paid back. This is not advice to go into extreme debt. But, having a little bit of credit with regular, on-time payments can help you establish a credit history. Lenders generally like to see a score of 620 or higher, though there are some programs that can go lower if you have extenuating circumstances.
Monitor Your Credit – There are lots of low-cost or free ways to monitor your credit. I personally have the Credit Karma app on my phone. It shows me my credit score (though I have had lenders tell me their scores aren’t 100% accurate). What I find most valuable, though, is that it tells me what I can do to improve my credit, whether it be making payments on time, keeping accounts open for longer periods of time, or reducing my available credit-to-debt ratio. Another great tool to use that offers similar services but also lets you track other bills is Mint. Some banks also have programs that can help you monitor your score – sometimes for free! Check with your bank to see if they offer this service.
Make Payments on Time – Again, this is a big one that can greatly reduce your credit score. Always make your payments on time, or you will see a negative result on your credit score that can stick around for years.
Have a Healthy Debt-to-Income (DTI) Ratio – To explain what this is, let’s break this down monthly. If you have $4,000 coming in every month, and you are paying $1,200 for a mortgage, $150 in student loan debt, and $100 for a credit card then your debt-to-income $1450/$4000 or 36.25%. This means that 36.25% of your monthly income goes to paying off debt. So, what qualifies as a good DTI ratio? DTI below 36% is considered very good. Lenders generally like to see a DTI ratio under 46%. However, every lender is different.
Have Money in Your Savings Account – This is smart for multiple reasons, but in terms of qualifying for a home loan, lenders want to see that you have a contingency. Should you get injured or lose your job, if you have some money socked away it would give you the time you need to find a new job or take time off while still being able to make your house payment. Additionally, when you purchase a house you will inevitably need to bring closing costs to the table. These can include down payments on your mortgage, title fees, funds for an escrow account, etc. Some loan packages like VA and CHFA loans have you bring little or no money to closing, but appraisals and home inspections are costs that you can expect to pay before closing. Some of these costs are pretty standard, while others, like costs of obtaining a loan, can vary wildly. Talk to a knowledgeable real estate agent to get a general idea of what kind of costs you can expect to see.
Have a System that Works for You to Make Yourself Accountable – It can be really hard to make positive financial choices in this day and age. There is always something we want to spend money on when we should probably be saving. In an effort to make saving money and paying off debt easier, it helps to see what you are actually spending money on, and where you can cut back. I mentioned Mint above, and it’s a great app to help you track your finances, create goals, and see where your money is really going. It’s free! Additionally, Dave Ramsey’s Total Money Makeover can help you by giving you a blueprint, so to speak. It’s a base plan for getting out of debt, paying bills, and putting money into a savings account. It’s a great place to get started and get motivated if you are improving your credit. Pikes Peak Library District has several copies, so you can start your journey by saving money and checking it out for free!
When you Think You Are Ready, Talk to a Reputable Lender…and Call Me! – I cannot emphasize enough how important it is to choose a lender based on their expertise, loan packages available, and ability to get your loan clear-to-close by your projected closing date. I’ve seen deals fall through because lenders are not on their game, and I’ve heard horror stories from colleagues about specific lenders or banks holding up closing on a home for up to five weeks just because they had a heavy workload! That’s five weeks the buyers were couch surfing because they had already put in their notice on their rental. Do yourself a favor and do your homework before choosing a lender. It’s also a great idea to choose a local lender who can be present at the closing table. Working with a lender who knows their stuff and can get you the best deal and the best monthly payment possible while also being easy to work with will save you loads of hassle. I’m happy to provide recommendations for local lenders with great reputations, but ultimately who you choose is 100% up to you!
Do you have any app or book recommendations? Put them in the comments so we can all see what technology is out there working for you!