Many people dream about homeownership. However, buying a home is such a big goal that it can be hard to know when you’re ready. To that end, we’ve created this financial wellness checklist. Read it over to get a better sense of whether or not you could be in the right place to purchase your first – or next – home.
Do you have a stable work history?
Your work history is one of the first things that lenders consider when you apply for a loan. Your ability to show a stable work history helps them feel confident that you have enough money coming in to cover a mortgage payment and that you’ll likely continue to receive that income for the foreseeable future.
In most cases, you’ll be asked to provide your lender with two years of W-2s and a recent pay stub with your year-to-date income listed. Self-employed individuals who do not have W-2’s will likely be asked to submit two years of tax returns instead.
If you’ve been at your job for a while, that’s a sign you could be ready to buy. On the other hand, if your employment has been sporadic recently or you’re considering a job change, it may make more sense to wait until things settle down to enter the market.
Do you have a handle on your debts?
The next metric that lenders consider is your debt-to-income ratio. As the name suggests, this equation measures how much of your income is being used to pay off debts. It helps lenders determine how easily you’ll be able to pay them back if you’re approved for a home loan.
You can find your current debt-to-income ratio by adding up all of your monthly debt payments, except your rent payment, and dividing that sum by your total monthly income. While every lender is different, they typically hope to see a ratio of 43% or less.
In general, the lower your DTI is, the better. If your DTI is higher than you’d like, think about taking some time to work on paying down your debts or finding ways to generate more income before trying to buy.
Do you have enough savings?
Once you have your debts in decent shape, it’s time to think about building up your savings. Put simply, buying a home comes with a few upfront costs and you’ll need to be sure that you’re ready to cover them before you start looking at available properties.
Here is a closer look at each one:
- Down payment: A percentage of the home’s purchase price that you’ll need to pay upfront in order to receive your home loan. Traditionally, people were asked to put 20% down, but these days, there are loan programs that allow you to put 3%-5% down.
- Closing costs: Processing fees that must be paid in order to close on the loan. These costs are typically equal to 2%-5% of the loan amount.
If you already have a decent amount of money in the bank, you could be in good shape to purchase a home. However, if you haven’t built up much of a nest egg, it’s a good idea to prioritize saving before you think that seriously about applying for a loan.
Do you have a decent credit score?
Lastly, consider your credit score. Your score is a strong indicator to lenders of how likely you are to repay your loan. If approved, it also plays a large role in the interest rate you’re given. The best, most affordable rates are generally reserved for those with the highest credit scores.
While most lenders typically like to see scores of 620 or higher, there are loan programs available for those with lower scores.
If you have a good or excellent score, there’s little need to worry. But, if you’re score is lower, you may want to take some time to work on it before moving forward. Making payments on time and paying as far above the minimum payment as possible are two of the best ways to positively impact your score.
Think you might be ready to buy?
If you’ve checked off most of the boxes on this checklist, get in touch with Premier Nationwide Lending today. One of our qualified lenders can help you take your first steps toward one of life’s biggest milestones.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.
