In simple terms, there are the fundamental factors you’ll want to consider when preparing to finance a house. If you want to buy a home, especially your first one, you're going to need to understand how to qualify for a mortgage. While it’s a pretty straightforward process, there are a few considerations to prepare for.
I like to call these “the big three”: Debt-to-income ratio, credit score and steady employment.
First is the debt-to-income ratio. This simply means the number of bills you have going out every single month, such as car payments, student loans and the new mortgage you are about to apply for. Lenders like to see this number at about forty-five percent. There are exceptions and variations, but you should plan for forty-five percent. This means all your monthly bills need to be slightly less than half your take-home pay. For example, if you make $7,000 a month, your new mortgage plus anything else needs to land at about $3,200 or less.
Next, consider your credit score. In general, a 720 or higher is going to get you a preferred interest rate but that doesn’t mean you can’t buy a home with less than a 720-credit score. This is something to discuss with your lender and see what your options are. If you’re planning on buying in the coming year though, it's a good idea to try and get that score up by eliminating debt, paying on time in full, and making sure you only use about half your credit limits at any given time.
Lastly, we have what I’ll call “steady employment”. If you have a salaried job and get paid on a W2, this is fairly straightforward. If you’ve worked at a salary-based job for a couple of months or longer, you are generally good. However, if you’re like a lot of people these days, you might be a gig worker, a contractor, or you might be self-employed in some way. This means you get paid on a 1099, which can be a bit trickier. Not to worry; it’s not impossible! Lenders like to see about 2 years of steady income for 1099 folks, so just keep that in mind when you are preparing to buy a house.
There are other things like down payment savings and moving costs to prepare for, but if you consider these three things well before you’re ready to get out there and look at houses, you’re going to be in good shape and you’ll likely be able to get the best interest rate available at the time. Happy house hunting!
Jacob Jones is a 16-year resident of East Nashville, a licensed Realtor, entrepreneur, and father.
