What three things do lenders look for when working with first-time buyers? We recently sought the answer to this question from a local expert.
Recently, I had the opportunity to speak with mortgage expert Ken Reed from Finance of America regarding the three things lenders look at when evaluating first-time homebuyers, and I’d like to share this quick list with you now:
1. Credit. Lenders will look at not just your credit score but also your credit history as they evaluate your financial standing. In terms of credit history, most lenders will look back over the last 12 months to check for any instances of late payments or other red flags. And as far as a buyer’s credit score goes, the minimum needed to buy a home is 580 for most programs. A score above 740 will allow you to obtain almost any loan you want, and will also allow you to achieve a favorable rate.
2. Income. Like credit, there are multiple aspects of your income that lenders will look at. First, they’ll look at your history. You should ideally have at least two years of employment history in the same line of work. In terms of how much you actually earn, most lenders will want to see if 45% of your gross monthly income will be sufficient to cover your future mortgage payments.
3. Assets. To be qualified, you’ll need to provide two bank statements to your lender. Depending on the qualifications of a borrower, a down payment might not be necessary at all. Veterans, for example, can purchase a home using the VA loan with zero money down. For FHA and conventional loans, the minimum down payment is 3.5%.
With these three points in mind, let’s also touch on a few things lenders don’t want to see from potential buyers.
First, there’s the matter of unsourced deposits in their bank accounts. Lenders won’t automatically assume you’re laundering money, but they are required to investigate.
The second mistake is less obvious. Completely paying off your credit cards before you buy could actually hurt your chances. Since credit history is important for getting approved, and paying off lines of credit can erase that history, it’s better to keep a minimal balance rather than a zero balance.
Overall, the best way to resolve any concerns you might have about your financial position is to speak with a lender. Lenders want you to succeed. If you meet with them in advance, they should be more than happy to help determine what you’ll need to do to get qualified.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.