How tenants can know if their finances are ‘mortgage ready’

Are you ready to buy a home? Many renters don’t know.

Millions of households who rent in 2022 will be able to buy a home that year, according to a new analysis by Zillow, which is based on estimates from the American Community Survey by the US Census Bureau.

By 2022, 39% of the 134 million families living in the U.S. will be homeless, according to Census data. Among the homeless, about 7.9 million families are considered “income mortgage ready,” meaning the portion of their total income used to pay a mortgage for a typical home in the area would be 30% or less, according to Zillow. meet.

Some people just choose to rent instead of buying. But on the other hand, households may not know if they can afford a mortgage, said Orphe Divounguy, senior economist at Zillow.

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If you’re coming to the end of your current home rental, it might be smart to see if you’re in a position to buy, says Melissa Cohn, regional vice president at William Raveis Mortgage.

“If rental prices are going to go up, it might be a good time to consider (buying instead),” he said.

Getting prequalified verbally from the lender can help, Cohn said. “The first step is to try to understand whether it is not necessary to collect all the documents,” he said.

But remember that you should go into those important conversations knowing important facts like your annual income and debt balance.

Knowing your credit status and debt-to-income ratio is a good place to start.

In order to know if you are ready to buy a home, it is important to know what the purchasing power is, said Brian Nevins, sales manager at Bay Equity, a Redfin-owned mortgage lender.

Some would-be homebuyers may not know what their credit situation is or are “anxious to check” because they mistakenly believe it will affect their credit, he said.

In fact, experts say it’s important to monitor your credit for months before buying a home so you have time to make improvements if necessary.

“This has changed so much in our industry that we now do soft credit verification, so it won’t affect other people’s credit scores,” Nevins said. “There’s no harm in checking.”

Your credit is important because it helps lenders determine whether to give you a loan, and if so, depending on your rating, with a higher or lower interest rate. And usually, the higher your credit score, the lower the interest rate offered.

That’s why being “credit invisible,” with little or no credit history, can slow down your ability to buy a home. But when you build credit, you need to strike a balance by keeping your debt-to-income ratio in line. Outstanding debt, such as student loan balances or credit card debt, can also slow your ability to get approved for a mortgage.

A very high debt-to-income ratio is the “No. 1 reason” applicants are denied a mortgage, said Divounguy. Essentially, lenders think that based on the ratio the applicant may struggle to increase their mortgage payments on top of their existing loan obligations.

To determine a realistic budget when shopping for a home, you need to know your debt-to-income ratio.

“The debt-to-income ratio is simply the amount of monthly debt you pay on your credit report,” says Nevins. “Think about your car payment, your student loan payment, the minimum payment on your credit card … any debt you’re paying and roughly your monthly mortgage payment.”

One rule of thumb for determining your hypothetical budget is the 28/36 rule. The rules state that you should not spend more than 28% of your gross monthly income on housing costs and no more than 36% of the total on all debts.

Sometimes, lenders can be more flexible, Nevins said, and will approve applicants with a debt-to-income ratio of 45% or even higher.

For example: If a person earns a monthly gross income of $6,000 and has $500 in monthly loan payments, they can make a monthly mortgage payment of $1,660 if they follow the 36% rule. If the lender accepts up to 50% DTI, the borrower may be able to take out a monthly mortgage payment of $2,500.

“That’s really the maximum for most loan programs that people can get approved for,” Nevins said.

Affordability and financial readiness also depend on factors like the average home sales price in your area, the amount of money you can put toward a down payment, area property taxes, homeowner’s insurance, homeowner’s association fees and more.

Talking to a mortgage professional can help you “map” all the factors to consider, says Cohn: “They give you goalposts, like this is what you have to get in order to buy.”