1. Good Credit.  Mortgage lending has only been using the FICO scoring system in loan approvals since 1998.  As a result of the financial crisis in 2007 and 2008, credit is an absolute must have.  

Sub-prime lending for buyers with FICO scores below 620 was readily available until 2007 but is now nearly impossible to obtain.

The better your credit score, the better your interest rate for your home purchase.  The minimum FICO score for most loan programs is 620 but the best rates are available with FICO scores over 740. 

Regularly check your credit to ensure that there are no “surprises” on your credit profile when you apply for a home loan.  The last thing you want to discover is an old utility bill or something that wasn’t paid and sent to a collection agency.  

The negative mark on your credit report would likely cost you hundreds to thousands of dollars more per year in your mortgage payment.

To check your credit profile annually from all 3 credit bureaus, go to www.annualcreditreport.com.  It is a free service you can use once per year and you can access your history with all 3 credit bureaus, Experian, Equifax, and Trans Union.  

This report shows your entire credit profile but does not show your FICO score.  Read through it thoroughly to ensure no errors or unexpected delinquencies exist.  Financing a home with poor or marginal credit is possible but will result in higher costs for the interest rate and other fees. 

You can even purchase without a FICO score or no credit history but would need at least 25% down and can expect a 0.375% – 0.5% higher interest rate.  

2. Income. As a result of new regulations stemming from the Dodd Frank Act of 2012, lenders offering conventional or government loans (95% of the mortgage market) must follow the Ability to Repay rule.  

Basically, lenders must document/prove your ability to pay the mortgage payment assuming you have stable employment or other sources of income.  

This means lenders only use income for mortgage loan qualification that can be documented.  Cash and “under-the-table” income cannot be used for mortgage qualifying.  

If you are a 1099 independent contractor or self -employed as a sole proprietor, your “net taxable income” is used to qualify for a home loan.  Business owners that file 1120s or 1065 tax returns use net business income for qualifying and/or W2 salary paid to themselves as long as the business is profitable.

I break the income topic down into much more detail in this article (How Lenders Calculate Your Income for Mortgage Qualifying).

The bottom line is your income over the last 2 years is the most important.  Hint, it looks better if your income is increasing from year to year.  If paid salary/hourly wages, qualification is based on your current gross monthly income (before taxes and deductions).

Income is usually the biggest determining factor in how much home you can qualify to purchase. If planning to buy a home within the next two years, ensure your income is stable or growing to give yourself the best chance to qualify for the home you want.

3. Assets. There are several low and zero down payment options available to you in today’s market.  Some cash assets are still necessary to cover earnest money/escrow deposits and closing costs.

Down payment and closing costs can only come from verified sources with your name on it.  Cold hard mattress cash, credit card ATM cash, unsecured personal loans, and other unverified sources of funds are not allowed to be considered as assets for your home purchase. 

Lenders usually request the last 2 months complete bank and investment account statements to verify assets, so any “large” deposits other than paychecks would need to be sourced and verified.  

Funds already in your account prior to these two months are considered “seasoned” and not necessary to be verified.

There are great options for down payment that few people are aware of in this article. 

When buying your first home, consider there is no more landlord or property manager to come fix the water heater or replace the AC unit, it is all on you.  

Therefore, a good idea is to have at least 2 months of housing payment in reserve when you get the keys for your new home purchase.  That way, your bank account is not completely wiped out, leaving you susceptible to unforeseen expenses or emergencies.