3. Down payment
Almost every mortgage requires a down payment. Even if you are seeking an FHA loan, your down payment will be smaller – but still required. If you’re looking for a conventional mortgage, you may need at least 20% down to qualify. With the average home price in the United States reaching nearly $300,000 (and even higher in major cities), you may need $60,000+ in cash to get started. While some lenders are starting to offer loans with low upfront payments (or even as little as 0%), they are few and far between.
In fact, I would caution you to think twice before buying a home with 0% downgrade. I know it’s tempting to save on a down payment. Whether you use the extra money to supplement your mortgage payments or invest in the booming stock market, be careful. Good times don’t last forever. There will always be another recession along the way. Making a higher down payment on your home can be one way to reduce your risk. Regardless, make sure you diversify your investments (including your home).
2. Income
Your income will also be checked. You have to show the lender that you are capable of making the payments. Not only is your income verified, but the lender also wants to see whether your income is sufficient to handle all your other obligations. They want to know about your car payments, student loan payments, credit card balances, or even child support obligations. All these numbers together make up your debt-to-income ratio.
Let’s say your monthly income is $4,500. Your loan payments (before mortgage) total $800 per month. This makes your debt-to-income ratio 17.78% (800/4500). Along with the proposed mortgage payment, your debt will also be assessed against your income. So, if your mortgage would be $1,200 per month, your total loan payments would be $2,000, and your debt-to-income ratio would be 44.44%.
Some lenders prefer to see a 28/36 qualifying ratio for the best terms. This means that your debt should not exceed 28% of your monthly income plus your debt plus Mortgage payment should not exceed 36%. In our example, the buyer meets the first part of the test, but not the second. The mortgage may be a bit high for this borrower.
