It’s a big question. If you’ve never owned a home before, you might be wondering when and if you will ever be able to. With so many factors going into the mortgage approval process, many people – especially younger, first-time home buyers – might think that homeownership is too steep a hill to climb.
However, while there are hurdles to becoming a homeowner, it’s not necessarily the non-starter that many people think it is. Sure, maybe it was easier to get into a home when your parents were your age, but that doesn’t mean it’s impossible for younger generations to own a home now.
To give you an idea of what being “ready” to buy a home looks like, we’ve come up with four scenarios involving hopeful first-time home buyers. We take a look at their finances – their incomes, credit scores, debts – and try to figure out if they’re ready for homeownership.
But first, let’s do a quick overview of the basics.
To buy a home, you have to have what it takes. Namely, a decent credit score and a history of reliable income.
If you don’t have those things, don’t panic. Everyone has to start somewhere. If you’re looking to buy a home in a few years but your finances are a little lackluster, the good news is that there are plenty of things you can do to improve your financial situation and increase the odds that you’ll be approved for a mortgage in the future.
When you’re applying for a mortgage, lenders will look at many aspects of your financial profile to evaluate how much of a risk you are. Guidelines may vary from lender to lender, but in general, this is what they’re looking for:
- Minimum credit score of 620 for conventional loans; 580 for FHA loans
- Good credit history
- Proof of reliable source of income
- Debt-to-income ratio (DTI) below 50%
If you don’t quite match up to those guidelines just yet, you can get on the right track by paying down your debts and improving your credit score. While you’re at it, open a savings account and put a little bit of money away each month. Once you decide you’re ready to buy a house, you’ll need money for a down payment. Start saving now, and you’ll thank yourself later.
Are These People Ready to Buy a Home?
Now, let’s look at the situations of four different millennials and determine if they’re ready to buy a home or if they need to work on their finances for a few more years.
Keep in mind, these aren’t concrete judgements about whether or not these people would qualify for a mortgage; we’re just evaluating whether they’re currently in a situation where they could potentially buy a house, and if it would be financially advantageous (or disadvantageous) to do so.
The Retail Worker
Credit Score: 650
Angela has worked at a retail store in her hometown for the past three years. She moved back in with her parents after graduation so she could save money. She wants to move out soon and has been looking at apartments in town, but she likes the idea of owning her own place. However, she worries that someone at her income level would have a hard time buying a home.
She’s still paying off some student loans, and a few years ago she made a couple of late payments on them. She’s worked hard since then to build a strong credit profile and hasn’t missed a payment since. Other than the student loans, she typically carries a small balance on her credit card most months.
She currently has about $8,000 in savings, and pays around $300 a month on debt.
Ready or Not?
Angela should probably take some more time to build her savings and pay down her debt. Plus, since her credit score is on the lower end of eligibility, if she were able to qualify for a mortgage, she’d likely have to pay a higher interest rate.
If Angela starts saving, she’ll have more money for a down payment. This translates to a lower monthly payment and, if she puts 20% down, she won’t have to pay mortgage insurance. If she continues to work on her credit and pay down debt, she’ll have better options when it comes to getting a mortgage. Paying down her debt will also lower her DTI, which is one of the major factors that lenders look at when considering an applicant.
Angela might also want to start looking for ways to increase her income, so that when she has a monthly mortgage payment, her budget isn’t stretched too thin.
When she does decide to apply for a mortgage and start looking at houses, she may want to consider an FHA loan, which can be a good option for first-time home buyers with a less-than-perfect credit history.
Credit Score: 720
Karen has worked at the same company for several years, although she just recently got a significant promotion that came with a large raise. Even on her lower income she was a good saver, and she now has about $25,000 in liquid assets.
She doesn’t have any negative marks on her credit report and she recently paid off her student loans, but she has a monthly car payment of about $500.
She wants to move in to a house of her own, but is wondering if she’ll be able to qualify for a mortgage based on her current salary, considering she’s only been at that level for around six months.
Ready or Not?
Lenders want to make sure you’re consistently earning enough to cover your mortgage payments, which is why they look at your earnings for the past two years.
Karen is right to be concerned about whether she can qualify for a mortgage based on her new income level, as it will reduce her DTI and open her up to more favorable loan terms. However, Karen is in a good spot because she’s a salaried – rather than hourly – employee. Lenders like salaried applicants because their income is considered more stable; even if they work fewer hours, they still make the same amount of money.
What Karen may have to do if she wants her lender to consider her new income is obtain documentation from her boss certifying that her salary change is permanent.
Based on the amount she has saved up, she’ll be able to put a good chunk of money down on a house, but will likely just fall short of 20% down, depending on her price range. If she wants to avoid paying mortgage insurance, she might want to consider saving a little bit more before buying a home.
Based on what we know, Karen may be ready to take the leap and try to get preapproved for a mortgage.
Credit Score: 700
Jim runs his own photography business and bartends part time. He makes around $45,000 per year, but his income fluctuates. He doesn’t have any savings, but he wants to start saving soon; he plans on buying a house with his fiance when they get married.
His fiance has a steady job and earns $50,000 per year but has little savings and a poor credit score. Jim wonders if they should apply for a mortgage together, or if only he should apply since he has a better credit score. He thinks they might be able to get a better rate that way. However, he worries that he may not be able to get a mortgage, since he’s self-employed.
Ready or Not?
The good news is that Jim won’t be barred from getting a mortgage simply for being self-employed. He might, however, be under increased scrutiny and have to provide more of his own documentation.
He’s right that his fiance’s credit score will likely be an issue if they apply together. However, if he applies for a loan by himself, he may not be approved for as much money as he would if they applied together.
Since neither he nor his fiance has any savings, the best route for Jim to take likely would be to wait a little bit so they can both start saving for a down payment. This also gives his fiance time to work on building a good credit history.
The Law School Grad
Credit Score: 660
Erin wants to own a home one day, but she’s worried her debt will prevent her from doing so. She went to a fairly expensive law school and paid for it using loans. She pays around $1,800 a month in student loan payments alone. She lives in a somewhat expensive city, but she has two roommates to keep her living costs manageable. On top of her loan payments, she also has a monthly car payment and a credit card payment.
She currently works as a law clerk and hopes this position might soon open up some new, better paying doors for her.
She has some savings, but she finds herself frequently having to dip into them for various emergencies and unexpected costs. More than once, she’s had to put these costs on her credit card because she didn’t have enough savings to cover them.
Ready or Not?
Before Erin considers homeownership, she should focus on paying down her debt and building a solid emergency savings fund so she doesn’t have to go into debt when unexpected costs arise.
Once she’s lowered her debt, she can start thinking about looking at houses. Not only will having a lower DTI make her more creditworthy to lenders, but it will make taking on a mortgage much easier for her, because she won’t be juggling multiple large monthly payments.
What Does This Mean for You?
Keep in mind that each of these scenarios is based on a limited number of factors; in reality, there will be many things that will influence your ability to take on a mortgage and get into a home. These examples are meant to show you what kinds of things you can be doing to increase your odds of success.
Don’t get discouraged if you’re not quite there yet. Being able to buy your own home is a huge achievement, and like any achievement, it takes time and work to get there. For many people, homeownership is perfectly attainable – you just have to be ready.
Are you ready? If so, you can get started online with Rocket Mortgage or talk to one of our Home Loan Experts by calling (800) 785-4788.
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