Credit Score, Down Payment, and Income
By Stephen McCarthy
Dreaming of buying a home can feel overwhelming. But like many big goals, breaking it down into steps can help bring your dream into focus.
To get started, you'll need solid credit, a down payment, and an annual income that supports your monthly housing costs.
Credit
Your credit score is a crucial metric. If you don’t have a credit history, you’ll need to start building one. Car payments, credit cards—it all matters. First and foremost, the cardinal rule is: PAY EVERYONE ON TIME! Set up auto-payments and calendar reminders. Do not be late. Ever.
This is especially important if you have a low credit score. Work to pay off any debt and always pay on time.
You can review your credit scores through your credit card accounts, bank accounts, or services like Experian and Credit Karma. You might notice that each scores differently. These services are excellent for monitoring your credit, but keep in mind that the scores they provide may differ from the one your lender uses.
Lenders value stability. Think carefully before opening or closing any credit accounts—and always pay on time!
Down Payment
You’re going to need a down payment. You might qualify for an FHA loan with a low downpayment, but the larger your down payment, the more favorable you’ll look to banks. Think 5% to 20% or higher. Just like when you bought your car, the more you put down, the lower your monthly payment.
But let’s say you have a six-figure down payment. If your credit is poor, you’ll still have a hard time securing a loan.
Income
Even with excellent credit and a large down payment, banks will only lend based on your income.
Matching your income to what you can afford means understanding your debt to income ratio (DTI) You need to know much do you pay out each month vs. how much you earn.
Lender’s want your total debt-to-income ratio to be less than 50% of your monthly income. So if you earn $75K annually and your total monthly payments should be less than $3,125.
- 50% of $75,000 = $37,500
- $37,500 ÷ 12 = $3,125
And remember—even with a great six-figure salary, poor credit and no down payment can hold you back from obtaining a mortgage.
(This post was edited for grammar and clarity using Microsoft Co-Pilot)
