Unless you have endless piles of cash or inherited a house, you (like the majority of adults) will need a mortgage to buy a house. Many years ago, when I knew I’d be purchasing a house in the future, I started working on what I needed to do in order to qualify for a mortgage. I had a hunch that I needed to start sooner than later in order to achieve my goal and I’m really thankful I did. Why? Because some of the qualifications I needed didn’t happen overnight.
So what qualifications do you need to obtain a mortgage? Based on my own experience, here are the three main things:
1. Good credit
This is the one qualification that could take a little longer than the others depending on your credit score. Seven years ago, when I got serious about wanting to own a home in the future, my credit score was shot. It was dismally below 600, which is terrible. I had made some bad financial decisions in my late 20’s and I needed to improve my score quickly. Thankfully, many of the negative items on my credit report, like charge-offs, were old. I contacted the credit bureaus (Transunion, Equifax, and Experian) and requested they be removed. That moved my score up about 100 points alone.
Next, I made sure that any current credit, in the form of credit cards and lines of credit, were being paid on time every month. I was also in a hurry to get my debt paid down so that my debt-to-credit ratio was under 30% or less. Over time, my score went from the dismal 560 to above 700. I’m now pushing 800 due to my on-time payments and very low debt-to-credit ratio (below 8%).
If you’re serious about buying a house, pull your credit scores. You can see your credit score for free on a few different sites, like CreditKarma.com. Also, many credit card companies now offer free FICO scores. Start here. Ideally, you want your score above 740 for the best APR. If your score is below 700, it makes sense to pull your credit report and see what’s bringing your score down. Late payments? Begin paying on time very month by automating your payments. Old, negative items? Write to the credit bureaus and ask them to remove those old items. Judgments, like an eviction? If it’s older than 7 years, write the bureaus and ask them to remove it. Each state has a slightly different rule about when a negative item can be removed.
2. A down payment
The rule of thumb for a down payment is to have 20% saved up. However, depending on the cost of houses in your area, 20% can be a whole lot of money. In some cases, you can put down less than 20%. For instance, it took me two years to save up my 10-percent down payment. Because my credit score if fairly high, 10-percent was all I needed to secure a low APR mortgage. The amount of your down payment will be partially determined by your credit score, so these two items are linked in some ways. For example, if your score is only in the mid-600’s, you may be asked to shell out more than a 10% down payment.
Of course, even if you only put 10% down on your house, you’ll want extra cash set aside for closing costs, home expenses, and a bunch of other little items that pop up like landscaping, furniture, appliances, repairs, etc.
3. A job
This seems like a no-brainer, but it’s important to know that most banks want to see a solid employment history. Usually, they ask for three months of pay stubs. Another caveat is that if you’re self-employed, you’ll need additional documents to prove you make money. The bank will most likely ask for tax returns, bank statements, and a profit/loss quarterly report. We ran into this ourselves. Though I am gainfully employed with a school district, Mr. LH works for himself. That doubled the amount of paperwork we had to submit.
Buying a house in my area has been quite the journey for Mr. LH and me. Of course, it doesn’t help that I live in a very expensive area, but at the same time I’ve learned a lot about credit and finances.
Are you in the process of buying a house in an expensive area? What did you have to do in order to qualify for a mortgage?