Qualifying for a mortgage and buying your first home in today’s economy is difficult under the best of circumstances. When you add the challenges incurred by a recent divorce or loss of a spouse, the process can seem impossible.
For many, especially those who have suffered from the emotional and financial strain of unexpectedly becoming single, it’s important to plan well ahead before you attempt buying your first home. Buying your first home on your own is not an impossible task, but it will require some forethought and preparation.
Increase your credit score
Your credit score is one of the most important factors in the mortgage approval process. While this is not the only factor, your credit score will be crucial in determining your interest rate and down payment requirement.
Scores may range from the low 300s to the mid 800s — the higher the number, the better. Not so many years ago, mortgages were routinely approved with credit scores in the mid-600 range. That’s not the case today. Even scores in the mid-700 range may be turned away if you fail to meet other criteria for buying your first home.
So what if your score is nowhere near the new standard? Don’t give up hope. With a little persistence and financial discipline, you can greatly improve your credit score.
The three main factors to consider are payment history, the amount owed and the length of your credit history, with the first two factors weighing heaviest. To improve your score, pay your bills on time. This one variable accounts for 35% of your overall score. With consistent, on-time payments, you’ll see a drastic increase in your score over a period of 6 months to a year.
Secondly, lower the total amount of credit card debt you have. Are your cards maxed out? Start paying them off and do your best not to use them again, especially for large purchases. Ideally, commit to not using credit cards once your house buying plan is underway.
Lastly, do not fall victim to the credit repair schemes that promise an instant fix to years of money mismanagement. Quick fixes do not exist. Bringing up your credit score takes time. Remember this is about planning and positioning yourself to be in the market over time, not about immediate results tomorrow.
Lower your debt-to-income ratio
Another key factor is your debt-to-income ratio. Like the credit score requirements, these standards have greatly tightened up over the past few years. However, you’ll find that working to improve your credit score will also have a positive effect on your debt-to-income ratio.
To calculate this number, total all your monthly recurring expenses. Include in this number any loan payments, credit cards or current mortgages. Divide this number by your monthly income.
Previously, mortgages were approved with a total debt-to-income ratio in the 50% range. Not anymore. Today, you should aim for the 35-45% range for your total household monthly debt. Lending agencies will generally calculate this number based on gross income. You should calculate this number on a net income basis. This calculation approach will allow you to stay well within the range when the time comes.
Save for a down payment
This will require an aggressive savings plan. Even if you meet the first two criteria, you still need a down payment. Remember, the higher the score and the lower the ratio, the less you will have to come up with out of pocket. Even still, the average down payment today is slightly above 20% of the home value.
Even if you do not fully meet these guidelines, you may still be able to qualify for an FHA or VA loan depending on your eligibility for the programs. Set these numbers as your goal and work diligently to accomplish them. Then at the end of a year, talk to a mortgage specialist about your situation. You’ll find that all your hard work has made the qualification process far easier to achieve.
Do you regularly monitor your credit score and credit reports?
Russ is a Certified Divorce Financial Analyst and fee-only financial advisor based in Atlanta, GA, and has provided personal financial advice to individuals and families for 20 years. His focus in on serving women, especially widows and divorcees. You can learn more about Russ and the work he does by visiting WealthcareForWomen.com. Find him also on Twitter, LinkedIn, and Google+.