Every individual has dreamt at least once of owning a beautiful home. Owning a home brings stability, a sense of accomplishment, and security for the homeowner. A significant step towards owning a home is obtaining a mortgage. This is the most crucial step in your journey to becoming a homeowner of a beautiful home.
But, there are various criteria that a lender looks at before you are eligible for a home loan. Even though reputable lenders such as Valley Strong Credit Union are always ready to help borrowers achieve their dream of owning a home, you must know the eligibility requirements beforehand if you are a first-time home buyer.
Who is a First-Time Home Buyer?
The U.S. Department of Housing and Urban Development aims to make homeownership more affordable and accessible.
It has defined a first-time home buyer as
- Someone who hasn’t owned a principal residence in 3 years
- Someone who is a single parent and has only owned a house with their previous spouse.
- Someone who is a displaced homemaker and has owned a house with their spouse.
- Someone who has owned a house not permanently affixed with the ground.
- An individual who has only owned a property that did not comply with building codes.
How to Determine Whether You Quality for a Mortage?
There are various eligibility criteria that banks and credit unions consider to determine whether you qualify for a mortgage.
Lenders want to ensure that you can repay the loan. You will need proof of income for a minimum of two years sufficient to pay the mortgage to be eligible. Hence, you may be ineligible for the loan if your income is too low or inconsistent.
It is crucial to remember that lenders don’t only see your monthly salary to determine your eligibility. They also check the following criteria:
- Military allowance
- Extra income from a side hustle
- Alimony or child support
- Income from investment accounts
- Social Security payments
- Any other type of commission.
The lender has to be assured that the income you are generating is consistent and that you can pay the EMIs.
A high income-to-debt ratio can make you ineligible for a home loan. When a lender lends a loan, they must know that you can pay all your bills and the home mortgage. Sometimes, it may be difficult for the lender to determine whether you can pay for the house mortgage just by looking at your income. In such circumstances, they look at the debt-to-income ratio or DTI.
The DTI ratio tells what percentage of your income pays your monthly bills. Many times, even if a person has a stable income, their debt is so high that they may be unable to pay a mortgage. Therefore, lenders consider the DTI ratio when lending a mortgage.
To calculate the DTI, first, add all your monthly stable incomes. Then, you must divide by your monthly expenses such as rent, credit card minimums, and student loan payments.
Your credit score plays a huge role in your eligibility for a home loan. The three-digit numerical rating tells how reliable you are as a borrower. A high credit score means you pay your bills on time, and a low credit score means you frequently lag in paying your bills.
You will need a FICO® Score of 620 points to qualify for most loans. However, first-time home buyers with a credit score as low as 500 may also be eligible for the loan based on various factors. Remember that lenders rely heavily on your credit score, often the primary reason for loan denials. Therefore, to enhance your credit score, you can start by paying your bills on time, paying all your outstanding bills, and avoiding new debts.
If you are a non-US citizen, you may face eligibility challenges, especially if you lack a permanent residence status. In such circumstances, you need to investigate the loan programs eligible for non-US citizens, such as FHA and VA loans, with more flexible eligibility criteria. A non-citizen’s eligible credit score is between 670 and 740, and an exceptional score starts at 800. Moreover, a non-citizen may also need a co-signer or co-borrower if they have a lower credit score or don’t meet other specific criteria.
Several factors impact your eligibility for a home loan in the USA. While the criteria may be overwhelming and leave you disheartened, many of them can be overcome with the right strategies and exploring suitable home loan options. You must improve your overall financial health, understand the lender’s requirements, and seek professional advice if you feel clueless. With strategic actions, you can soon own the house of your dreams.