Thinking about buying a home? Preparation is key—and not just when it comes to finding the perfect neighborhood or home style. Before you even start shopping for houses, it’s important to understand what lenders look for, how to set your finances up for success, and what steps can help strengthen your offer.

Here are a few essentials to consider before starting your homebuying journey:
1. Understand Your Credit Score
Lenders use credit scores to assess how likely you are to repay your loan. They pull this score from the three major credit bureaus—Experian, TransUnion, and Equifax—and use the middle score of the three. For joint applications, the lower of the two middle scores is typically used.
Depending on the loan program and lender, minimum credit score requirements range from 580 to 680. The better your score, the more favorable your interest rate is likely to be.
2. Be Ready to Show Steady Income
Lenders generally want to see a stable two-year employment history, ideally in the same or similar line of work. If you’re self-employed, you’ll need to show at least two years of verifiable income through tax returns and business documentation.
Short gaps in employment usually aren’t an issue, but longer breaks might require a written explanation.
3. Know What Income Counts
Income that may help you qualify includes:

• W-2 wages
• Rental income
• Investment income
• Social Security or retirement income
• Alimony or child support (optional to disclose)

This variety gives some flexibility—but all income must be verifiable.
4. Learn Your Ratios
Lenders use two qualifying ratios to gauge affordability:

• Housing ratio: Your monthly mortgage payment should be no more than 30% of your gross monthly income.
• Debt ratio: Your total monthly debts (including mortgage, credit cards, and other loans) should be no more than 43% of your gross income.

These ratios help determine how much home you can realistically afford.
5. Get Pre-Qualified or Pre-Approved

• Getting pre-qualified gives you a ballpark figure of what you can borrow. It’s based on self-reported finances and is helpful early in your search.
• Getting pre-approved, however, means a lender has reviewed and verified your income, credit, and assets. A pre-approval letter makes your offer more competitive and shows sellers you’re serious.

6. Avoid New Credit During the Process
Once you’ve started the mortgage process, it’s important not to apply for new credit cards, car loans, or financing of any kind. This can lower your score and increase your debt-to-income ratio—potentially jeopardizing your mortgage approval.
7. Know Where Your Down Payment Is Coming From
Your lender will need to verify your source of funds—whether it’s savings, retirement accounts, the sale of assets, or even a gift. If someone is helping you with your down payment, they’ll need to sign a gift letter confirming it doesn’t need to be repaid. You might also use a gift of equity if purchasing a home from a family member below market value.
Some buyers borrow from their 401(k) or investment accounts, but keep in mind these payments may count toward your monthly debt obligations.
8. Understand Closing Costs
Closing costs typically add up to around 4% of the loan amount. These may include:

• Lender and title fees
• Appraisal and credit report costs
• Prepaid insurance and property taxes

It’s important to factor these in alongside your down payment when budgeting.
9. Learn About Loan Types
There’s no one-size-fits-all mortgage. Options include:

• Conventional loans
• Low down payment loans
• Adjustable-rate mortgages (ARMs)
• Jumbo loans
• Government-backed loans like FHA, VA, or USDA

A mortgage specialist can help you choose the right fit based on your financial picture and homebuying goals.
10. Make a Strong Offer
In a competitive market, a strong offer goes beyond the price. Consider including a pre-approval letter, minimizing contingencies, and working closely with your real estate agent to make your offer stand out.

Ready to take the next step?
Get started with a mortgage specialist at Sandia Area to review your loan options, ask questions, and prepare for a smooth homebuying experience.
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Or download our Home Buyers Guide to see more resources to help you feel prepared.