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Are You Ready to Buy a Home? An Easy Way to Check

The real estate market is dismal these days, which means bargains-a-plenty for first-time home buyers. Problem is: the real estate market is suffering because so many homeowners took out loans they can’t repay. In turn, mortgage lenders have tightened their purse strings, making qualifying for a home loan a challenge.

That’s not to say getting a mortgage today is impossible. Could you qualify for a mortgage? Here are the three numbers that hold the answer.


When you apply for a mortgage, the bank looks in three areas: your credit score, your down payment, and your debt-to-income ratio.

To qualify for a mortgage, you must be strong in at least two out of three.

Credit Score

Credit scores, most commonly your FICO score, range from 300 to 850; the higher the better. It used to be that borrowers with FICO scores of 700 or more would qualify for the best rates and terms.

Today, consider a 700 FICO score the minimum needed to grab a first-time mortgage.

Hope to buy a home soon? Consider monitoring your credit score with one of several services and taking care to protect and improve your score.

Debt-to-Income Ratio

Lenders want to see that you will be able to afford your current monthly debt obligations and your new mortgage and home ownership costs, and still have some cash left over each month. To determine this, they use the debt-to-income ratio, or the percentage of your monthly income that goes to existing debts.

You’ll want your debt-to-income ratio must be under 20% before applying for a mortgage, and less than 10% is best.

For example, if you earn $36,000 a year and you have two credit cards with minimum monthly payments totaling $50, a student loan with a $120 monthly payment, and an auto loan with a $200 monthly payment, your debt-to-income ratio would be 12.3%.

You can also use this principle to determine how much house you can afford to buy. A common rule of thumb is the 28/36 rule. Your monthly housing payments (including your mortgage, insurance, and property taxes) should not exceed 28% of your gross monthly income.

Furthermore, your total debt should not exceed 36% of your gross monthly income. Therefore, if you have a 12.3% debt-to-income ratio, expect a housing payment that is no more than 23.7% of your income. In the example above, that payment would be $711.

Down Payment

A higher down payment doesn’t just reduce the amount of money you need to borrow to afford a particular home, it also reduces the risk your lender must assume, and can actually increase your chances of getting approved.

If your down payment is less than 20%, you will need to pay private mortgage insurance (PMI), which can up your monthly housing costs by a few hundred dollars. Hence, it pays to start saving now!

Ready to go house-hunting? Save time, money, and aggravation by lining up your financing first with a mortgage pre-approval. Get mortgage pre-approval online.


Published or updated on April 9, 2008

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. cris says:

    If i am thinking to buy a house from a home owner. known as owner finance do i qualify for the tax credit?

  2. A little-discussed but very important part of buying a home is the septic system inspection. Nearly 30% of homes have a septic system. The typical cursory septic system inspection does not give you the true picture of your septic system’s condition. If you end up buying a house with a failing septic system or one that is not up to code, it could cost you $5,000 to $20,000 in replacement costs.

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