Getting Ready for a Mortgage - What First-Time Homebuyers Need to Know

"For first-time homebuyers, it’s not just about finding the right home—it’s about understanding the process, being prepared, and making smart financial choices that set you up for long-term success." - Tom Ferry

If you're ready to buy your first home, congratulations! It’s an exciting step, but before you start house hunting, it’s important to get your finances reviewed to ensure that you qualify for a mortgage. As a first-time homebuyer, understanding how to prepare can make the process smoother and help you get the best deal possible. Let’s break down the key factors lenders look at when approving you for a mortgage.

1. Credit Score: More Than Just a Number

Yes, you can buy a home with a 500 credit score, but do you want to? With a score that low, you’re looking at a minimum of 10% down payment and you will have a much higher interest rate. Why? Because it’s a big risk for lenders.

Most have heard that you can qualify for an FHA loan with as little as 3.5% down if your score is 580 or higher. While that’s true, the sweet spot for better terms and rates starts at 620. The higher your credit score, the lower your interest rate will be. Keep in mind that having a higher score can save you thousands over the life of your loan. For more about how rates work, check out my previous blog post.

2. Debt-to-Income Ratio (DTI): Balancing Your Budget

Your debt-to-income ratio (DTI) is another major factor. Lenders want to know how much of your monthly income goes toward paying off debts like credit cards, student loans, or car payments. Here’s how it’s calculated:

• DTI = Total Monthly Debt Payments ÷ Gross Monthly Income

For example, if you pay $1,000 a month toward debt and make $5,000 a month, your DTI is 20%. Lenders generally want to see a DTI under 43%, though lower is always better. This shows them you can handle your mortgage payment comfortably without being overwhelmed by debt.

3. Income: Stability is Key

Lenders look for stable income. They typically require a 2-year history of steady income, which means keeping your job history consistent. If you’re self-employed, it might be a bit trickier, but having solid documentation and showing a steady income stream over the past two years will work in your favor.

4. Assets: What Do You Have?

In addition to income, lenders want to know what assets you have. This includes savings, investments, or any other liquid assets that can be used for your down payment and closing costs. Showing you have a financial cushion helps prove you can cover the upfront costs of buying a home.

Documents You’ll Need for Pre-Approval

When applying for a pre-approval for a mortgage, lenders will need to review some documents to verify your financial standing. Here’s a quick checklist of what to have ready:

• Last two years of tax returns (if you are self employed or business owner)

• Recent pay stubs (last 30 days)

• Bank statements (last two months)

• Proof of assets (401k, stocks, etc.)

• W-2s or 1099 forms from the last two years

• Valid ID

Pre-Qualification vs. Pre-Approval: What’s the Difference?

When it comes to getting pre-qualified vs pre-approved let’s clear up some confusion. A pre-qualification is an estimate of what you might be able to borrow based on basic information you provide, like your income and debts. It’s quick but not very detailed. Usually during this process the lender will not verify any documents for accuracy.

A pre-approval, on the other hand, is a more official statement from the lender. They’ll review your credit, verify your income, and look at your financial documents. A pre-approval gives you a much clearer picture of how much house you can afford—and sellers take you more seriously when you have it.

Bottom Line

Getting ready for a mortgage takes some preparation, but by understanding your credit score, debt-to-income ratio, and what documents you’ll need, you can make the process a lot smoother. While you can buy a home with a lower credit score, aiming for that 620 or higher score will give you better terms and lower rates. Keep your financial house in order, and you’ll be in the best position to turn your dream of owning a home into a reality.

Got more questions? Reach out to me, Chantelle Davis, your Mortgage Strategist, and let’s get you one step closer to homeownership!