Purchasing a home is one of the biggest financial investments you’ll ever make. So, before you start looking for that dream home, it’s essential to do a little research on what to expect during the home-buying process. Read on to brush up on the basic requirements to buy a house and what lenders usually consider during the mortgage approval process.
Key Takeaways:
- You can prepare to buy a home by getting your financial affairs in order and knowing what to expect before you begin the mortgage application and lending process.
- Other essential steps include knowing your credit score, debt-to-income ratio (DTI) and the differences between home loan options.
- Additionally, it’s crucial to be aware of the down payment and closing cost requirements for your preferred home loan.
What Do You Need In Order To Buy A House?
Planning to buy a house with a home loan? Lenders are required to evaluate your finances to determine if you’re qualified for a mortgage.
Before speaking with a lender, assess your finances. This includes considering the criteria a lender will use to judge your financial health and your ability to make mortgage payments.
Typical Requirements To Buy A House
The requirements for loan approval vary by lender, loan program and other factors.
There are a few elements of your financial profile, however, that a lender will usually evaluate, along with various benchmarks you’ll likely need to meet to be approved for a home loan.
1. Credit Score
A good credit score and credit report can benefit you greatly when buying a home.
Although credit score requirements vary by lender and loan type, a good credit score improves your chances of being approved for financing and can help you qualify for a better interest rate and loan terms.
You’ll typically need a credit score of at least 620 to be approved for a conventional loan, but other loan programs have more relaxed credit score requirements.
Want to improve your credit score before buying a house?
- Pay all your bills on time.
- Keep your credit card balance well below your credit limit.
- Review credit reports via AnnualCreditReport.com to understand any pending credit actions that must be remediated. Reviewing reports also allows you to identify any errors (that should be reported).
- Avoid opening new credit accounts.
2. Debt-To-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is another key factor that impacts mortgage approval.
Lenders use your DTI to determine if you can afford to take on more debt – specifically, your monthly mortgage payment. The lower your DTI is, the more comfortably you can afford to pay your mortgage.
For a conventional mortgage, lenders generally prefer a DTI of no more than 43%. This means that the total amount you spend on monthly debt payments, including your mortgage payment, can’t exceed 43% of your pretax monthly income.
It’s possible that your DTI can be higher for some government-backed loans. But the lower your DTI is, the better. If you need to reduce your DTI, pay off your existing debts as quickly as possible and avoid taking on new debt.
3. Proof Of Income And Finances
When you apply for a home loan, mortgage lenders must verify that you have an income that’s large enough and stable enough to afford your monthly mortgage payments.
Lenders will review your financial documents to determine if you can afford to take on more debt. Documents typically include bank statements, pay stubs, tax returns, an employment verification letter, and W-2 or 1099 forms.
Keep in mind: If you’re self-employed, qualifying for a mortgage is still a possibility, but you may need to jump through a few extra hoops.
4. Down Payment
Consider how you will fund your down payment. The down payment is the upfront cost you pay when you close on a home, represented as a percentage of the property’s purchase price. Making a larger down payment reduces the amount you need to borrow, and potentially reduces your monthly payment, too.
Minimum down payment requirements range from zero down on some government-backed loans to as much as 10% down, or even more, on jumbo loans. You may want to consider applying for down payment assistance programs that help with your down payment or closing costs.
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5. Closing Costs
Closing costs are another expense when buying a house. These fees cover various expenses associated with the completion of your real estate transaction.
Typically, both the buyer and seller pay closing costs, but as a buyer, you may be able to negotiate with the seller to have them cover a portion of your closing costs.
Typical closing cost fees include:
- Title insurance
- Appraisal fees
- Home inspection fees
- Loan origination fees
- Attorney fees
You can expect to pay 2% – 6% of the loan amount in closing costs.
6. Mortgage Lender And Loan Type
It’s crucial to select the right mortgage lender and loan for your specific situation. When deciding on a lender, you’ll want to see what they can offer you based on your financial standing.
Start by checking out what interest rates and loan terms you could expect from different lenders, then consider reading online reviews of lenders or asking friends and family members for their recommendations.
The best lender for your needs will depend in part on the home loan programs they offer. For example, some lenders specialize in underwriting mortgages for individuals who are self-employed, offering products like bank statement loans; this type of loan focuses on using monthly cash flow (verified via bank statements) for income qualification.
As you explore options, consider eligibility requirements, down payment and credit score requirements, and the interest rates commonly associated with each type of loan. You should also explore whether you’re a better candidate for an adjustable-rate or fixed-rate mortgage.
Types Of Home Loans
Here are three of the most common home loan options:
- Conventional loans: A conventional loan is backed by Fannie Mae or Freddie Mac, not the federal government, and may allow for a down payment as low as 3% of the purchase price. If you want to avoid private mortgage insurance (PMI), however, you’ll need to make at least a 20% down payment.
- FHA loans: Backed by the Federal Housing Administration, an FHA loan has more relaxed credit score requirements compared to a conventional loan. With a credit score of 580, the minimum down payment is only 3.5%. If you have a credit score between 500 and 579, a minimum down payment of 10% is required.
- VA loans: A VA loan is backed by the U.S. Department of Veterans Affairs and is available to active-duty service members, veterans, surviving spouses and members of the National Guard and U.S. Army Reserve who meet the eligibility requirements. VA loans require no down payment and typically have a slightly lower interest rate than conventional loans. VA loans include a funding fee, which can vary based on the loan type and the loan amount. The amount of your down payment and whether or not this is your first VA loan also may impact the amount of the funding fee.
7. Mortgage Prepparoval
Getting preapproved is not a requirement to buy a house, but it’s generally a good idea to do so. That initial approval is often referred to as a mortgage preapproval.
Here’s how it works: A lender reviews your credit score, income and other financial information, then tells you how much house you can afford.
A mortgage preapproval shows sellers that you’re serious about buying and have the financial means to purchase a home up to a certain price. It can also help you stand out against other buyers.
If you are denied an initial mortgage approval, don’t feel discouraged. Your lender can suggest specific steps that you can take to improve your chances of getting approved in the future.
Practical Tips For Buying A Home
Now that you know what you need in order to buy a house, here are some tips to help you prepare to make the actual purchase:
Set A Budget
Creating a budget helps you have realistic goals while house hunting. If you know how much house you can afford, you’ll know which homes are worth considering as well as your ideal home loan type.
Understanding how much you’ll need for a down payment, closing costs and homeownership expenses is also beneficial. Plus, it’s wise to have some money set aside in an emergency fund.
Find A Real Estate Agent
A good real estate agent brings market knowledge and expertise. Not only do agents have access to the Multiple Listing Service (MLS), but they also typically have a network of professionals who might know about lesser-known listings, called pocket listings.
Real estate agents should be prepared to handle negotiations throughout the home-buying process, provide guidance on the housing market and assist you with navigating the paperwork.
Research The Housing Market
It’s extremely helpful to be aware of the state of the real estate market before purchasing a home. Knowing current interest rates and what to look out for in the housing market can play in your favor. Understanding whether you’re in a buyer’s market or a seller’s market is also key, as this can significantly influence your decision to buy soon or wait.
Take The First Step To Buying A Home
Find a lender that will work with your unique financial situation.
FAQ
Here are some answers to frequently asked questions about the requirements to buy a house:
During closing, you’ll need to provide documentation – including a purchase agreement, offer letter, home appraisal documentation, closing disclosure and proof of insurance – as well as a certified check for the down payment and closing costs. Your lender and real estate agent can provide further guidance as you move through the process.
For a conventional home loan, you should expect to make a down payment of at least 3%. Down payment requirements vary by mortgage type and can depend on other factors, too, such as creditworthiness.
The Bottom Line: Know The Requirements To Buy A House
Buying a house may seem complex if you’re not familiar with the real estate market or home-buying process. But having a basic understanding of the requirements to buy a house, hiring a real estate agent and researching the housing market can put you in a better position to buy with confidence.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
