Before you call a real estate agent, start touring homes, or get excited about a listing, stop and check your numbers first. Buying a house is not something you wake up one Monday morning and decide to do. You have to do the background work.
A FICO survey shared with USA Today found that 59% of Americans do not fully understand the steps involved in buying a home. Among first-time homebuyers, that number rises to 64%. That is a lot of people going into one of the biggest purchases of their lives without a clear picture of what a mortgage lender is actually looking at.
From an underwriting standpoint, there are three numbers you need to know before you even think about house hunting:
- Your credit score
- Your qualifying income
- Your debt-to-income ratio
A good credit score alone does not guarantee that you can qualify. I have seen people with credit scores in the high 700s and even 800s get turned down because their debt-to-income ratio was out of whack. I have also seen people making a good hourly rate discover that their qualifying income was much lower than they expected.
1. Know Your Credit Score, but Understand What It Really Means
Yes, your credit score matters. You need to know where you stand before you apply for a mortgage. You can review your credit reports through AnnualCreditReport.com, then take the time to address anything that needs attention.
Now, people will say, “You only need a 580 score,” or “I bought a house with a 620.” And yes, it may be possible to buy a home with a lower score depending on the loan program, lender, and overall file. But that is not the same thing as getting the best mortgage terms.
My recommendation is simple: aim for at least a 660 credit score, and preferably 700 or higher.
Why a 660 Score Matters
A score of 660 or above generally puts you in a stronger position for interest-rate pricing and mortgage approval parameters. When your score is lower, the lender sees a higher level of risk. That risk can show up in the form of a higher interest rate and tighter qualification requirements.
For example, if a borrower with a stronger credit profile is being quoted a 6% rate, a borrower with a lower score may see a higher rate. The exact difference varies by lender and market conditions, but the point is that lower scores can cost you money.
FHA guidelines may show a 580 score as a minimum in certain situations, but many lenders are not excited about taking on the additional risk of a borrower at that level. A 580 score means you may be eligible on paper, but you are barely there. It does not put you in the best position for a smooth approval or favorable pricing.
Your credit score is evidence of how you have managed debt in the past. A higher score tells the lender that you have a stronger history of making payments as agreed.
What if You Have to Move Right Now?
Sometimes life does not give you six to twelve months to prepare. You may need to relocate for a job, move because of military orders, or go back home to help take care of family. If you have to secure housing right now, you may have to move forward with the score you have.
But if you have time, use it. Six to twelve months can make a real difference in your score, your rate, and your overall mortgage options. Do not leave that work until the last minute.
No Credit Score Can Still Hurt Your Mortgage Pricing
Do not assume having no credit is better than having low credit. A lack of credit history can still affect mortgage pricing. It is generally better to establish a score than to have no score at all.
If you need to start building credit, secured credit cards can be one way to establish revolving credit. Revolving credit is what helps move your score. The key is to use credit responsibly, keep balances manageable, and pay on time.
2. Calculate Your Actual Qualifying Income
Once you understand your credit score, the next thing to figure out is how much income a mortgage lender can actually use. This is where many people get surprised.
It is not enough to say, “I make $30 an hour,” or “I have a full-time job.” You need to know what your income averages out to on a monthly basis.
For Hourly and Salaried Employees
For a straightforward hourly position, begin with your hourly rate and expected hours.
- If you earn $20 an hour and work 40 hours per week, that is $800 per week.
- Multiply $800 by 52 weeks to get annual income.
- Divide that annual amount by 12 to estimate gross monthly income.
For someone earning a salary, the calculation is usually more direct. If you earn $60,000 per year, your gross monthly income is $5,000.
But not everybody works a standard 40-hour schedule. Many medical professionals, maintenance workers, and other employees have rotating shifts, assignment-based pay, variable hours, or pay based on completed tasks. In those situations, you need to determine what you actually average over time.
Your Hourly Rate Does Not Tell the Whole Story
I worked with a young man who had been referred by a prior client. He said he had no debt and wanted to buy a house. He also appeared to make good money based on his stated hourly rate.
But when we looked closer, his work was paid by assignment or task. When everything was broken down, he was only averaging about 22 hours a week. His pay rate looked good, but the actual amount of qualifying income was not enough to support the kind of home he wanted to buy.
He could qualify for roughly $125,000, which does not go far in many markets. The lesson is simple: do not get your hopes up based on a number that does not reflect your actual average income.
If you are a W-2 employee, know exactly how you are paid and how consistently you work. If your income varies, take the time to understand the average before you start looking at properties.
Self-employed borrowers and people doing gig work are calculated differently. Those files require a closer review of income history and tax returns. That is why it is so important not to assume that every dollar you earn today will automatically count toward a mortgage qualification.
3. Calculate Your Debt-to-Income Ratio
Your debt-to-income ratio, commonly called DTI, is where a lot of mortgage applications fall apart. Your credit score only gets you so far. If your debt-to-income ratio is too high, it is not going to work, even if you have excellent credit.
Debt-to-income compares your monthly debt obligations with your gross monthly income. Mortgage lenders use it to determine whether the proposed housing payment fits with the rest of your monthly financial obligations. The Consumer Financial Protection Bureau’s homebuying resources also explain why reviewing your income, debts, and budget before applying is so important.
Which Debts Count?
Start by listing your monthly debt payments. This includes revolving debt and installment debt.
- Credit card minimum payments
- Auto loans
- Student loans
- Personal loans
- Debt consolidation loans
- Other recurring installment obligations
For revolving credit accounts such as Visa, Mastercard, Discover, American Express, and similar cards, use the minimum payment shown on the account when calculating DTI.
For example, you may have a $10,000 credit card balance and personally pay $300 each month. If the required minimum payment is $100, the $100 payment is generally what is used in the debt-to-income calculation. It is the minimum payment that counts for this purpose.
Do Not Get Priced Out Before Adding the House Payment
Many people are already stretched too thin before the proposed mortgage payment is even added. That is why you must know your monthly debt before you begin looking at homes.
Here is the honest truth: if your debt-to-income ratio is too high, there are only two ways to improve it:
- Increase your income.
- Reduce your debt.
That is it. There is no new math that changes the situation. If the numbers do not work, the numbers do not work.
Should You Get a Second Job or Start a Side Hustle?
A lot of people say they will get a part-time job, drive for Uber, do DoorDash, or start another side hustle to qualify for a house. That can be a smart move, but you need to understand how mortgage underwriting looks at that income.
If you are just starting a second job or a new gig and plan to buy within the next six to twelve months, do not count on that income being used to qualify for the mortgage. In many cases, lenders want to see a two-year history before they can rely on that income for qualification.
You also need to remember that self-employment and gig income are affected by taxes and write-offs. If you write off all your gas, maintenance, supplies, and other expenses, you may reduce the taxable income that could otherwise be considered for qualifying purposes.
So if you are starting a side hustle now and plan to buy soon, my advice is to use that money strategically:
- Pay down revolving debt.
- Reduce monthly loan payments where possible.
- Build your down payment fund.
- Set aside money for closing costs.
Do not focus on trying to make brand-new income count immediately. Use it to improve the financial picture you already have. Paying down debt can strengthen your DTI much faster than waiting for a new income stream to develop a usable history.
Check a Co-Borrower’s Numbers Too
If you are buying with a spouse, partner, boyfriend, girlfriend, family member, co-borrower, or co-signer, do not just look at your own information. You need to look at their credit, income, and debt too.
It is easy to get excited because you think you have everything together. Then you find an agent, begin touring houses, and fall in love with a home, only to discover that the combined numbers are nowhere close to qualifying.
Everybody whose income or credit will be part of the loan needs to do the same homework:
- Check credit scores.
- Confirm actual qualifying income.
- List all monthly debts.
- Calculate the combined debt-to-income picture.
Do This Before You Call a Lender
Before you start the homebuying process, know your numbers. Get your credit score as high as possible. Confirm how much income you actually make. Add up your monthly debts and compare them to your income.
Do not wait until you have found the perfect house to discover that you cannot afford it or cannot qualify for the loan amount you need. A little preparation on the front end can save you disappointment, wasted time, and money later.
Check your credit. Calculate your income. Calculate your debt-to-income ratio. Then start house hunting.
This information is for general educational purposes only and is not financial, legal, tax, credit, or mortgage advice. Mortgage guidelines, rates, lender requirements, and qualification standards vary by lender, loan program, location, and borrower profile. Consult a qualified mortgage professional about your individual situation.
