FAQs

Most people who buy a home use a mortgage loan to finance the majority of the purchase price. Lenders consider an applicant’s debt-to-income (DTI) ratio when deciding how much they are willing to loan for the purchase of a home. If you have higher debt, such as from student loans, car loans, or credit card debt, you will need to have a higher income to show that you are able to comfortably pay all of your bills. The lender compares these two amounts to make sure that you can handle adding the monthly mortgage payment.

For those traditionally employed, you will need to provide your pay stubs or W-2s to show your most recent earnings. Contract employees can provide a 1099 form to show the same information. If you are self-employed, your previous few years’ tax returns will be needed to show a strong history of income. In general, self-employed and contract workers need to show a longer history of earnings because their income can fluctuate more. You can also provide documentation of income earned through commissions, bonuses and overtime, military benefits, alimony and other court-ordered payments, investments and retirement accounts, and social security.

Income and DTI are not the only things that a lender wants to know when considering your mortgage application. They also look at your credit score, the purchase price of the home, and the percentage that you plan to put down as a down payment. If your income is lower than ideal for your home purchase but you have little debt and an excellent credit score, your lender might still be comfortable approving your loan. Be prepared to provide documentation of every recurring expense that may impact your ability to pay back the loan. There is no set amount of income that you need before you can purchase a home, but it is always a good idea to get your debt as low as possible before beginning your application. Talk to your lender about your individual situation and what steps you can take to become a homeowner.

When you are ready to make a new home purchase, the first thing to consider is who you want on your team. A Realtor or real estate agent can be your advocate throughout the process. While it is not required to have a Realtor or real estate agent when buying a home, working with this knowledgeable professional can result in a smoother process and get you into the perfect home faster.

If the bank or mortgage company determines that your loan is a risk, they may require private mortgage insurance. This insurance serves to insulate the lender in the event that you default on your loan. It is possible that the fair market value of your house will not cover the full amount of money owed to the bank or mortgage company if you default. In such cases, private mortgage insurance reimburses the lender for the difference. Private mortgage insurance is usually required for borrowers that make a down payment of less than 20% or with poor credit scores.

You can get a conventional loan with as little as 3% down, but you will pay private mortgage insurance (PMI) until you reach 20% equity. FHA loans require at least 3.5% down and include the mortgage insurance for the duration of the loan. But, FHA loans have lower credit requirements, so they are a good option for those without a strong credit history. Don’t let the lack of a down payment keep you from your dreams of homeownership. If one of these options works for your situation, you may be able to get into your own home quickly and with no or little money down.