What Lenders Look For From First Time Home Buyers

By Joshua Bucio

Many people looking to buy their first home don’t fully understand what most lenders are looking for in getting pre-approved. A pre-approval letter is very important, before starting your home search, since real estate agents and sellers know that a serious buyer gets pre-approved first.

Here is a breakdown of some great tips for first time home buyers and what lenders are generally looking for.

Credit Scores

When you receive your credit report, you will receive three credit scores from the three major bureaus. Trans Union, Equifax, and Experian. Most mortgage lenders go off of the middle of the three credit scores. For example, if you have credit scores of 640, 650, and 680, they will use the 650 score.

Most lenders require a minimum middle credit score of 640.  You want to take the time to know your credit score, before contacting a lender to get pre-approved. This way you will know ahead of time if you even meet the minimum score requirement or if there are any items that you need to work on repairing.

Down Payment

The down payment will vary, depending on the mortgage program you qualify for.  The more of a down payment you have, the more likely you will qualify and for a larger loan amount.  If you don’t have enough for a down payment, you can usually use money that has been gifted to you from a family member.  Government grants are also allowed with some programs.

Liquid Assets

Most lenders only accept liquid assets. These are assets like a checking or savings account that you have immediate access to the funds available. A retirement account like a 401k is also acceptable, but typically lenders only accept 60% of the balance as liquid.  Assets like automobiles are typically not acceptable as assets for a mortgage pre-approval.

You will need to show you have the funds available for the down payment and closing costs, but it helps to show you have reserves. Reserves are additional liquid assets after the down payment and closing costs. It helps to show you have 2-3 months of the mortgage payment as reserves to help strengthen your file.

Employment

A two year history of employment is going to be required by most lenders. If you had multiple jobs in the last two years, this is typically ok. It helps to show you have been in the same line of work and only switched jobs because of more income or a better position. If you had gap between jobs in the employment history that is more than 60 days, make sure you have at least 6 months on the current job before working on getting pre-approved.

Debt and Income Ratio

Your debt to income ratio is calculated by the total amount of monthly payments reporting on your credit report (i.e. student loans, auto loans, etc.), plus the total payment of the mortgage (including property taxes and insurance), over the total amount of monthly gross income. (gross income is before taxes)

For example: If you have a credit card payment of $100 and an auto loan payment of $300, plus the new mortgage payment total is $1200, your total in monthly debt would be $1600. You have a salary of $50,000 or $4166.67 in monthly gross income ($50,000 divided by 12). The debt to income ratio would be 38.4% (1600 divided by 4166.67).

You want to keep your debt to income ratio under 45% for most mortgage programs. The FHA program does allow up to 55% debt to income ratio, but the higher this gets the more risk is added to your file and could jeopardize your pre-approval.

Conclusion

Now that you understand the best things to prepare for, keep in mind lenders still look at your overall situation.  It helps to have a positive to offset an negative thing you may have.  For example, if you have short employment history, you can help offset this with a large down payment or high income.

Email Joshua Bucio at jbucio@homeloanwisconsin.com