Many renters might be closer to homeownership than they realize. A recent Zillow analysis found that millions of renters in 2022 could have afforded a house. In fact, around 7.9 million renters were "income mortgage-ready," meaning they could have managed a mortgage payment without spending more than 30% of their income.
If your lease is ending soon, it’s worth checking if buying is a viable option for you. With rising rental prices, now might be a good time to consider purchasing instead.
Knowing your credit score is essential because it helps determine loan eligibility, down payment requirements, interest rates, and loan terms. Many potential buyers are unsure about their credit situation or worry that checking it will hurt their score. However, soft credit inquiries, like checking CreditKarma or freecreditreport.com, do not affect your score.
Here’s a breakdown of credit score ranges and what they mean:
If your score is anywhere from "Good" to "Excellent," you might be more ready for homeownership than you think. If you think your score needs some work, that's ok too! A low credit score doesn’t always mean you haven’t paid your bills on time. It might be because you're still building credit or because you’ve recently paid off and closed credit accounts, which can temporarily affect your score.
If you’re looking to boost your credit score, here are three strategies to consider:
You should be monitoring your credit months in advance and focus on improving it if necessary—the higher your score, the lower your interest rate. Improving your credit score takes time, but Churchill can find the right mortgage plan for you, even if you’re working on your credit.
If you have no credit score, this means you are credit invisible or have a credit score of 0 with the three credit bureaus. There is more documentation involved when applying for a no credit score loan, but once approved the process is as seamless as any traditional home loan. Most lenders do not offer loans without a credit score, but Churchill Mortgage accommodates this type of loan on a regular basis with expertise.
Prequalification is when a lender takes a quick look at your finances to see how much you might be able to borrow for a mortgage. It's a simple check of your income, savings, and credit to give you an idea of your loan options. It's important because it helps you know your budget before you start home shopping, instead of looking at homes out of your price range.
Want to quickly find out how much you can afford? Try this free calculator for an estimation.
Your debt-to-income (DTI) ratio is the percentage of your income dedicated to debt payments such as car loans, student loans, and credit card minimums. A high DTI is a common reason for mortgage denial. Lenders usually look for a DTI of 36% or lower, but some may accept higher ratios.
If your DTI ratio is higher than 36%, here are some ways to lower it:
Remember, the cost of a mortgage includes more than just the monthly payment. Here’s a quick rundown of common expenses:
Principal: The loan amount after subtracting your down payment from the purchase price.
Interest: The fee you pay to borrow money, calculated based on your principal.
Insurance: Homeowner’s insurance is mandatory. If you put down less than 20%, you’ll also need Private Mortgage Insurance (PMI) or Mortgage Insurance Premiums (MIP) for FHA loans.
Closing Costs: These fees cover various services and usually amount to 2-5% of the loan. They include application fees, property taxes, and title company expenses.
While it’s exciting to think about owning a home, it’s crucial to ensure you’re truly ready for the commitment. There are several signs that you might need to wait before taking this step. If your job situation is unpredictable or your income fluctuates, you might struggle with consistent mortgage payments. A low credit score can make it tough to get a loan or result in higher interest rates, making homeownership more expensive.
Additionally, if your debt-to-income ratio is high, adding a mortgage payment could be overwhelming. Without enough savings for a down payment and emergency funds, you might face financial strain. Lastly, if you're unsure about your long-term plans or location, buying a home might not be the best move right now.
Talking to a mortgage professional can help you navigate these steps and set clear goals for buying a home. We can provide personalized guidance on what you need to qualify for a mortgage, help you understand all the costs involved, and ensure you’re making informed decisions every step of the way.
If you're still unsure if now is the time, take our quick "Are You Ready to Buy?" quiz for your free Readiness Report!