You’ll need proof of two or more years of recent and consistent income. This includes your salary as well as other earnings like military benefits, alimony, social security, etc. Most lenders ask for documentation like tax returns, pay stubs or W-2s, bank statements, credit history, renting history (if applicable) and a photo ID.
You’ll also need a good debt-to-income (DTI) ratio, typically under 43% but in some cases up to 50%.2 This is the percentage you get when you divide your total monthly debt (including things like rent, credit cards, and student loan payments) by your monthly pre-tax income, and lenders use it to figure out your maximum home loan amount. (If you’re new to DTI, you can learn more about it here.)
Another way to think about your finances is the 28/36% rule: ideally, your housing costs should be less than 28% of your income before tax, and all your debt (including housing) should be less than 36% of your pre-tax earnings.3
Some loan types have limitations around primary vs. vacation homes/investment properties. If you’re looking for a primary residence, places to start include conventional loans as well as government-backed loans like Federal Housing Administration (FHA), Veterans Affairs (VA), or U.S. Department of Agriculture (USDA) loans are geared towards primary residences. You might also want to check out Landed’s down payment program (if and when it’s available in your area).
While FHA and VA loans may have lower requirements, 620 is the minimum credit score4 you need to qualify for most loan types.
What if you have great credit? In general, a credit score of 680+ could improve your mortgage rate by at least one percent,5 which could lead to significant savings.
When it comes to your down payment, most loans require at least 5% down,6 although FHA and VHA loans require less. Either way, the more you can pay up front, the better; a larger down payment reduces your monthly mortgage payments, and if you can contribute 20% for the home’s cost, you can avoid private mortgage insurance (PMI). If you need help getting to 20%, you may want to look into Landed’s down payment program.
Closing costs usually work out to 3%–6% of the total loan value.7 As the name implies, they’re due at closing, and often include things like appraisal, attorney, and escrow fees.
It’s also important to budget for home repairs and furnishings, which can be more than you expect. For example, one study found that new buyers spent an average of $2,700 within the first five years of owning their new home.8
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