9 Requirements to Buy a House
Dreaming about buying a home, furnishing it beautifully, hosting memorable dinner parties, and creating a perfect back yard for the kids? Before you dive into house hunting, it’s crucial to ensure you meet the essential requirements to buy a house.
We’ve outlined nine key requirements to get squared away before scheduling those showing appointments. By preparing these in advance, you’ll be well-equipped to navigate the home-buying process smoothly and confidently when you find your ideal home.
1. Steady employment
Generally, lenders will look to see that you’re employed and in a stable position. Ideally, you’ve been working at the same place for at least two years.
During the Verification of Employment (VEO) process, the lender will confirm your current job title and length of employment. They also may assess the stability of your future employment, ensuring there is a strong likelihood that you will remain in your position for the next five years.
If you’re self-employed, don’t fret! You can still get a loan. While it may be slightly more difficult as a self-employed borrower, there are still loans out there for you. They might require additional documentation that typically isn’t needed for standard W-2 employees. Lenders also will rely heavily on your tax returns to verify the consistency of your self-employed income. Plan on providing at least two years of detailed returns.
2. A solid income
In addition to the length of employment, lenders will also review your salary to confirm you’ll be able to pay the loan back.
If you make an annual salary, the lender will divide that amount by twelve to check your monthly take-home pay. If you’re paid hourly, most lenders will take your average number of hours worked per month and multiply that by your hourly wage.
If you make overtime or receive end-of-year bonuses, the lender will take two years of overtime or bonuses and then divide that by 24 to get the monthly average. And if more than 25% of your pay is from commission, the lender will take the average of 24 months of income as your take-home pay.
The process is the same if you’re self-employed. If that’s the case, you’ll likely need to supply an IRS Form 4506-T (a Transcript of Tax Return).
When we spoke to Joe Bourland, a Phoenix-based real estate agent with more than 23 years of experience, he noted that buyers who have recently switched careers (for example, if you worked in construction for 15 years but recently became a personal assistant) also may need to show two years of steady income, with no significant dip in salary that came with the job change.
3. Minimal debt
Debt is just as important as income when you’re applying for a mortgage. It’s measured by the debt-to-income (DTI) ratio, which shows how much of your monthly income goes toward paying off debts. To calculate it, divide your total monthly debt payments by your gross monthly income. For instance, if you make $5,000 a month and have $1,500 in debt payments, your DTI ratio is 30%. Lenders use this ratio to see if you can handle additional debt, like a mortgage, and generally prefer a lower DTI to make sure you can manage new payments comfortably.
Credit use is also key, as it makes up 30% of your credit score. To get the best mortgage rate, you’ll want to keep your debt low. Aim to use less than 30% of your available credit. For example, if your credit card limit is $12,000, try to keep your balance at $4,000 or less. This helps you keep your credit score high and boosts your chances of getting a great mortgage deal.
