One of the most important steps in buying a house is making sure that you’re financially ready. As homeownership is mainly a financial undertaking, you need to get your finances in order and know the things that can increase your chances of getting a mortgage pre-approval.
Stable Employment History
Lenders look at your income and employment history when assessing your eligibility for a loan. In most cases, mortgage companies want to see at least two years of consecutive employment history. If you’re an employee at a company, you can prove this by providing at least two years of W-2s. If you’re self-employed, on the other hand, you can give them a copy of your tax returns.
But if you’re starting on a new job and don’t have a stable employment history, you can still get approved for a mortgage. This is because there are lenders with lenient requirements and those who prefer borrowers who have worked in the same industry or field for the last two years. The trick is doing your research and working with the right lenders.
Good Credit Score
Your credit score tells the banks and lenders your ability to pay your bills, as well as the total amount of your debt. Mortgage companies in Utah note that a high score (740 or above) demonstrates that you’re financially responsible, making lenders more confident that you can repay your monthly mortgage payments as agreed.
With a fair or poor credit score, you can still get a loan, but it’s likely for the interest rates to be higher. So if you’re planning to buy a house with a poor credit score, it’s best to improve your score first before applying for a loan.
Reasonable Debt-to-Income (DTI) Ratio
Lenders look at your DTI ratio to assess if you can afford to buy a house. DTI ratio refers to the amount (in your income) spent in paying off your all debts every month. You can use a DTI ratio calculator to determine your percentage or calculate in your own by adding all your debts (monthly) and dividing it by your gross income (monthly). In general, lenders prefer a DTI ratio of 36% or less.
If your DTI ratio exceeds 36% or 40%, you can still get a loan but it’s likely to have higher rates. You should also know that borrowers with high DTI ratio are more likely to have trouble in making payments. So, it’s best to improve yours first to get attractive deals on a mortgage.
Healthy Savings Account
While you don’t need to have millions of dollars in your account, it pays to have a healthy savings account to cover the initial expenses when buying. You need to save or pay for a down payment, which can be anywhere between 3.5% and 20% of the sale price. You can pay a small amount, but it’s best to hit the 20% mark to avoid private mortgage insurance.
Apart from the down payment, you also need to save or have money for closing costs. These vary from state to state and lender to lender and can be between 2% and 5% of the home’s purchase price. Ask your lenders about the closing costs other extra fees to prepare accordingly.
If your financial situation isn’t looking good, you can take some time on improving it. You can start by paying down your debts, building your employment history and increasing your savings.