3. Down Payment
Almost every mortgage requires a down payment. Even if you are seeking out an FHA Loan, you down payment will be smaller- but still required. If you’re seeking a traditional mortgage, you might need at least 20% down in order to qualify. With the average house price in the USA creeping up to around $300,000 (and much more in major cities), you could need $60,000+ in cash just to get started. While some lenders are starting to offer loans with lower down payments (or even 0% down), they are few and far between.
In fact, I would caution you to think twice before buying a house with 0% down. I know it’s tempting to save on the down payment. Whether you use the extra funds to supplement your mortgage payments or invest in the booming stock market, be careful. The good times never last forever. There will always be another downturn down the road. Putting more down payment into your house can be a way to lower your risk. Regardless, make sure you diversify your investments (including you home).
Your income will also be checked. You need to show the lender that you can afford to make the payments. Not only is your income verified, but lenders also want to see if your income is sufficient to handle all of the other obligations you might have. They want to know about your car payments, student loan payments, credit card balances, or even child support obligations. All these numbers come together to form your debt-to-income ratio.
Let’s say you have a monthly income of $4,500. Your debt payments (before the mortgage) total $800 per month. That makes your debt-to-income ratio is 17.78% (800/4500). Your debt will also be figured, relative to your income, along with the proposed mortgage payment. So, if your mortgage will be $1,200 a month, your total debt payment would be $2,000, and your debt-to-income ratio 44.44%.
Some lenders like to see what is called a 28/36 qualifying ratio for the best terms. This means that your debt shouldn’t be more than 28% of your monthly income and your debt plus the mortgage payment shouldn’t be more than 36%. In our example, the buyer meets the first part of the test, but not the second. The mortgage might be a little too much for this borrower to handle.