When you decide the time is right for you to purchase a home, the next hurdle you will need to cross is securing your mortgage. Since buying a home will likely be the biggest investment you ever make, you want to make sure you know what you’re doing as you begin applying for your mortgage. To get the home of your dreams, it will come down to how much you can get approved for by a lender. Many factors play into this, so here are some of the most important you should keep in mind.
Gross Income
When you apply for a mortgage, most lenders will typically approve you for an amount of money that is no more than three times the amount of your yearly gross income. For example, if your annual gross earnings are $100,000, this means you may be able to get approved for a mortgage of $300,000. However, since different lenders have different policies, do your research when applying for the money you need.
Credit Score
Even if your annual gross income is somewhat low, that may not matter to a mortgage company if your credit score is fantastic. Should you have a credit score of 720 or higher, chances are almost any lender will approve your mortgage, unless you are wanting to buy a home that is clearly out of your price range.
Debt-to-Income Ratio
When lenders are considering mortgage applications, they pay close attention to your DIR, also known as your debt-to-income ratio. If you want to have the best chance of being approved for your mortgage, it is recommended that your DIR be no more than 43 percent, based on your gross income. As an example, if your gross monthly income is $5,000 and you are spending $2,500 each month on debt, you have a DIR of 50 percent. While this won’t necessarily disqualify you from mortgage consideration, it is likely the lender will approve a lesser amount of money, meaning you may not be able to get the home that is your first choice.
Your Down Payment
If you approach a lender for a mortgage and can verify you have already saved up a substantial amount of money for a down payment, this will put you in a much more favorable light. Should you be able to save up to $25,000 or more, you will have a good chance of gaining approval.
By doing your homework before applying for a mortgage, you may be able to impress a lender enough so that they give you the benefit of the doubt regarding your DIR or credit score. If you play your cards right, you will soon be living in your dream home.
