Lenders will often consider whether you have a good credit score.
Often, you’ll need a down payment saved up to qualify for a mortgage.
You may need to tap into your savings to repair something that a home inspection missed.
Having steady employment and income may improve your chances of mortgage approval.
Think you’re ready to buy a home? Here are 5 signs you may be prepared to take the first steps toward doing so.
1. You have a good credit score
Your credit score is an important factor that lenders consider when evaluating you for a mortgage. It is used to assess your level of lending risk. A good credit score may indicate that you have done a good job of repaying your debts in the past and that you are likely to make future mortgage payments on time.
Your credit score may also affect the interest rate you get on a mortgage. A lender may reward high credit scores with attractive interest rates for their good payment histories.
2. You have saved for a down payment
Most mortgages require that you make a down payment on the home you’re buying, although the amount you will need to qualify can vary depending on the mortgage type. With some mortgages, like FHA loans, you may be able to purchase a home with as little as a 3.5% down payment. Other mortgages may require more.
Although you may be able to purchase a home with a relatively small down payment, the more down payment you can make, the less you will have to finance. This will help you save money on interest over the life of the loan. Also, if you make a down payment of at least 20%, you may not be required to carry private mortgage insurance (PMI).
3. You have an emergency fund
It’s a good idea to have a home inspector go through a home you have made an offer on to assess its condition. If any problems are discovered, you may be able to negotiate with the seller to have them fixed before closing.
A home inspector may miss some things, however, like a problem with the septic system or a pest infestation inside a wall. Because of this, it’s important to have sufficient savings to cover any unforeseen expenses that may arise after the purchase is complete.
4. You have stable income
Another important factor that a lender may consider is your employment history. This is usually done to make sure you can repay the money you borrow.
If you have lengthy gaps between employment or frequent job changes, there is a chance that your lender may not approve the loan. It could also be approved with a higher interest rate because of the increased risk.
5. You’ve been paying down your debts
How much debt you currently have is another important factor. This is done to make sure you aren’t overextended, which could lead to missed payments or default.
Lenders evaluate your current debts using a metric known as the debt-to-income (DTI) ratio. It’s a simple comparison of your gross monthly income to your monthly debts. You can calculate your DTI ratio with the following formula:
DTI Ratio = Monthly gross income / monthly debts * 100
Lenders usually prefer to see DTI ratios of 35% or less. If yours is higher, you may be able to improve your chances of being approved for a mortgage by paying down some of your debts before applying.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.
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