Mortgage crises or not, it’s still a great time to buy your first home. Be smart, however, and have a pre-approved mortgage in hand before going house hunting. Applying for (and getting approved for) a mortgage before you shop could save you time, money, and heartbreak. Here’s how.
Buying your first home might just be one of the most exhausting experiences of your life, but the dividends—like the pride and financial security of home ownership—are worth it. You can, however, take some of the sting out of your first home-buying process by readying yourself for the mortgage application and approval process.
Understanding the mortgage market
Not long ago, anybody with a job could get a mortgage. Banks hawked poor credit loans and adjustable rate mortgages like crack—tricking borrowers into thinking they could afford egregiously expensive loans. Unfortunately for the banks—and the home buyers they duped—these lending habits were unsustainable; banks made loans borrowers simply could not repay.
Starting in late 2006, homeowners began defaulting on mortgages at record pace, and the rash of delinquencies and foreclosures devastated banks’ mortgage investment portfolios. Since then, banks have tightened their purse strings. Today, it takes good credit and the right income and references to get a mortgage. But it can be done—even in your twenties.
What it takes to get approved for your first mortgage
Before completing a mortgage application or even strolling through an open house, make sure that you are prepared for the mortgage application process. You’ll need to know these three things:
- Your credit health
- Your monthly budget (income and expenses)
- Your mortgage budget (home price and available down payment)
Your credit health
Before applying for a mortgage, obtain your credit history report and check it for errors. Since you may shop for homes over the course of several months, consider subscribing to a service that provides regular credit report updates for around $12-20 a month. Your estimated FICO credit score should be least 675 and preferably above 700. Anything less and you will need to find a highly-qualified cosigner or take time to improve your credit before getting a first mortgage approval.
Your monthly budget
The next step in preparing to apply for your first mortgage is to document your monthly income and expenses. Gather paystubs and up to three years of tax returns. Mortgage underwriters may also ask to see your monthly expenses. If you need help organizing them, try these budgeting tools. Also, any large recurring monthly expenses (like an auto loan) will hurt your chances of getting approved for a mortgage. If possible, pay these loans off or, at the very least, avoid taking any new loan payments on prior to applying for a first mortgage.
Your mortgage budget
Before ever speaking with a mortgage officer, determine how much house you can afford. A good rule is that your total housing payment (including fees, taxes, and insurance) should be between 28 and 35% of your gross (pre-tax) income. For example, if together you and a co-buyer earn $80,000 a year, your combined maximum housing payment would be between $1,866 and $2,333 a month.
It can be difficult to equate this monthly payment to a fixed home price, as your monthly housing payment is subject to variables like mortgage interest rate, property taxes, the cost of home insurance and private mortgage insurance (PMI), and any condo or association fees. In some cases, taxes, insurances, and fees may be equal to or greater than your actual mortgage payment.
Next, determine how much you can save for a down payment to put towards your first home. In today’s market, expect your mortgage lender to require at least a 10% down payment. If you have it, consider putting 20% down to avoid PMI—costly insurance that protects your mortgage lender should you foreclose prior to building sufficient equity in the property.
Understand what you can afford before beginning the mortgage. Real estate agents, your own desires, and some unscrupulous mortgage lenders may try to tempt you into buying a more expensive home than you can afford, perhaps rationalizing the decision by reminding you that real estate is a great investment. That’s true, but a smaller investment you can afford to keep in good times and bad is worth far more than a larger investment you lose to foreclosure.
When and where to apply
Speak with your local bank (or even better, a credit union)—or get pre-approved for an online loan like our favorite, the ING Orange Mortgage—before house hunting. You’ll know where your approval chances stand and roughly how much house you can afford. Shop around for the best rates, but beware pushy lenders. Mortgage officers should want to help you get approved, but good ones should be honest if your credit, income, or budget doesn’t stack up.
Are you a home owner in your twenties? What was getting your first mortgage like?
I'm David Weliver. At 26, I had NO savings and NO financial plan. I was maxed out, stressed out, and fed up. Then, I changed. I repaid $80k of debt, tripled my income, and bought a home. I'll show you how to get similar results. 
Hi, I’m 18 years old from Warren, Ohio and wanting to buy a house. My fiance and I currently rent a home. As I have found out the hard way renting is a lot more expenisive then buying and I also feel by renting I’m throwing my money away into a blackhole I’ll never see again. I am also in a pickle, our rent is 450 dollars a month, I recently talked to a real estate agent over the phone who informed me that I could be owning my own home and paying way less then 450 a month for the size home we were renting! I’m engaged to my 25 year old boyfriend, who unfortunalty has horrible credit from his previous relationship. I on the other hand am 18 with no credit, which is almost as bad as no credit! I have nothing saved for a down payment, and I have no credit. Is there anything I can do to help my situation, Please help me, we really want to be home owners!!!
The best thing for you to do is start saving for a downpayment and get your boyfriends poor credit back up to average or high. This can be done through make payments on time, paying down credit cards, and things along those lines.
Also, I your situation I would be very careful what you dive into. A house for under $450 may come along with several costly repairs at anytime. Also, co-signing a place for both of you can be very risky in case you break up or one of you loses a job, etc… Anyways, I would hold off for at least a few years. Good luck!
My husband and i are hoping to buy a home sooner rather. His credit is horrible, mine is great, but, while i make good money, most is cash, i only claim a small amount on my taxes. I am wondering what do people in my situation do? (waitresses, nanny’s, bartenders, etc). We have saved up enough for a 20% deposit, but are wondering if that is enough considering our situation.
I’m in the exact, well extremely close to, same boat. I’d love for an answer to this question!!
You could just pay taxes like an honest citizen.
I am 21 years old and looking to purchase an investment property. I found a home that I would like to buy and I am looking for a $100,000 loan. Asking price is only $84,000, but I would like the extra in case of needed emergency repairs. The property is safe for the first year because it already has a lease on it, however I am not sure how I can make the bank take me seriously because in my current situation I have very little personal income. I do however have no living expenses what so ever. My credit score is 738, but I have very little credit history, and only a $1000 limit credit card. I have $10,000 saved up for a down payment, and the income from the property being rented is more than enough to cover the mortgage, insurance, taxes, and utilities, along with some minor repairs. I am just wondering what I would be able to do to make a bank take a college student seriously?
I am 29 and my husband is 54 and we are waiting for a response on our own mortgage application and very eager. to kayla above, bank any money you can save. wait a while so see if your bf will be the one to get a 30 yr mortgage with (trust me)keep good credit, tell bf to start with a secure credit card. Jason – without a decent size income a bank will not touch you.Your 21 , get a second job for a year or two and then look into investment property. You cannot enter the housing/commercial market with out income of your own. everyone good luck in your endeavors.
hi, I am 25, my dad purchased a home for me and the documents are on my name, and the income from the property being rented is more than enough to cover the mortgage, insurance, taxes, and utilities, along with some minor repairs.
So? You still can’t get a man…
Hi, me and my fiance are getting married June 30, 2012 and we’re looking to rent an apartment. I, however, want to buy a house. Neither one of us have credit and we are both 20 years old. Currently I am the only one working, but he is supposed to be getting a job that pays about 13+ and hour within a week or two. I want to be in a house by the time we get married. Is this at all possible or do we still have a long way to go? And how in the world am I supposed to get credit?
Credit cards and save save save!
Credit cards dont help people… society has made us think we NEED them… when in reality we dont.
Hi Bonnie,
I’m kind of in the same boat as you are too and I would love an answer from this question. And I just thought it was a cool thing that me and my fiance’ have the exact same wedding date and you and yours.
What percent of people who get pre-approved get final approval? My husband and I were pre-approved for $250K. We found a house for $245K. We gave the bank all of our information prior to the pre-approval. Now they say they aren’t sure if we’ll be able to get the house. What gives? We haven’t taken out any new debt and they knew our numbers going in.
Say BYE BYE to all your CREDIT CARDS…. they are EVIL!!! I am doing the Dave Ramsey Financial Peace course and I agree that everything should be paid for in CASH…. unless its a mortgage, and then it should be a 15 year loan. Credit cards get people in more debt than help them. You can raise your credit score without having a credit card… just pay your bills on time! Its taken me awhile to do this but Im finally working really hard at it. I hope some or all of you check out Dave Ramsey… hes heped my family and a few friends achieve what we want out of life in just a few years… and none of us are even in our 30s yet! But we all have homes, and newer cars with no payments. We have savings and emergency funds. Its amazing what you can do if you work hard.
Hello,I’m 25 my fiance and me are trying to save for our first home, he is 24 and his income is around $7,000 a month and his credit is between 630 to 700, he just start this job like 3 months ago and he is getting check but they are not taking taxes out, he will have to do it at the time of his taxes. his 2010 income was around $14,000 i was his dependent because for my pregnancy i wasn’t working. My credit is really bad,we repo and all that due to co-signing for another people. Is his income good enough for a home approval? what is the lower income approval for the bank?