At CIG, those are words you hear every day. In the hallway, at the water cooler, in the break room. Up there with “thank you,” “excuse me,” and “that skirt is fire.”
It is, quite simply, what we do.
But that begs the question–what is “Home Ready?”
The basic gist is easy to deduce: Home Ready means you are ready to purchase–and thus take out a mortgage on–your own house. So you could say that “Home Ready” also means “Loan Ready.”
So that’s how we’ll define the term: a person (or couple) who can successfully qualify for a mortgage that accomplishes their specific goal of homeownership.
What It Takes To Become Home Ready
Ok, that makes sense, but, like….what does that mean?
That’s where it can get tricky. It’s important to understand that any lender who writes a mortgage can decide whether or not the risk for that mortgage is worth taking on. This means that the lender can (and often does) have its own set of guidelines in addition to whatever general guidelines might have been put in place by regulators or government agencies.
So, that means there will be some variance based upon the lender.
We can help you understand the general industry guidelines as well as how lenders tend to look at the problem. And CIG’s Home Ready Desk can help you navigate the rest if you are looking for more personalized guidance.
Here are the criteria:
- Requirement: 640 minimum FICO for most programs.
- Exceptions: 580 minimum in some cases if borrower brings a large down payment (10-20%+).
The credit score is obviously the big one. Your tri-bureau (Experian, Equifax, Transunion) FICO scores will play a central role in any application for credit. A score above 640 is a good target to aim for whenever applying for a mortgage. The chances of getting approved with a lower score than that are not great. While it is possible, it’s generally much easier to boost your score above that level than to go the opposite route. Some lenders and programs will require a higher score than 640 or charge extra points at closing to help offset the risk. So a target of 720+ is often recommended in order to give you the very best odds (and price!) at getting that dream home you’ve been working towards. And if you’re feeling intimidated by that–don’t be. 720 is very reachable for anyone if they take the right steps.
- Requirements: 2 years proof of income with a strong likelihood to continue; income must be stable or growing (not declining); tax returns showing you’re paying taxes on any nonexempt money.
Just make more money, right? If only it was that easy. We all want to make more and most of us believe we are worth more than we make, so this isn’t a quick one to fix. However, there are a couple of things you can do to get your income in line so that you can qualify for that loan you need with the money you make. First, you need income documentation. You’ll need to provide your 2 most recent pay stubs to verify your wage. Two years of w2s and tax returns will be required to show your income is stable or increasing. Documentation from your employer directly to your lender called verification of employment will need to be done to verify that your income is likely to continue. And that is for simple w2 income. Benefits letters for SSI, 401k statements for retirement, and 1040s for self-employment are all additional requirements if using that income to qualify. There are many types of qualifying income that all require their own specific documentation.
Two years’ worth of incoming documentation, and two years of tax returns. Lenders are looking for signs that you are in a stable financial situation and even if you’re not increasing your income, they want to see that you’re at least maintaining at your current level. Also keep in mind that you can use Social Security, disability, or VA benefits when qualifying.
- Requirements: Less than43% of your gross income tied up in debt payments.
If you’ve ever seen this tricky little acronym floating around when reading about mortgages and wondered what it meant, you are not alone. The ratio between how much money you make, before taxes, social security, and other deductions, versus how much you pay in monthly debt payments is known as your Debt-to-Income Ratio or DTI. DTI can be a little complicated, so you’ll want to ask your lender about it if you’re looking for more detailed information. The important thing is to understand that lower is generally better. If you make $2000/mo and your debt payments are $1000/mo, that is a 50% DTI. A good rule of thumb is that your mortgage payment is about one-third of your income and no more; plus all your other debt combined is under half. Different loan programs will have different DTI requirements, but sub-50% is a must. Anything lower than 40% is considered ‘good.’ Between 40-50 is going to require powerful mitigating factors like a fabulous credit score or giant down payment.
- Requirements: No 30-day late payments on installment accounts within the last 6-12 months depending on lender overlays.
This is one that has tripped up a lot of borrowers. Many people think that if their score is in line, that means their ‘credit’ is where it needs to be. But it’s important to know that late payments–30 days late or more–on installment accounts are a BIG factor that mortgage companies look at when evaluating you as a borrower. So make sure to have at least one year of solid history paying your installment accounts when preparing to apply. Installment accounts are things like car loans or mortgage loans. Non-installment, also known as “revolving” accounts, are things like credit cards or lines of credit. Maintaining a rock-solid payment history on installment accounts is key.
Bks/ foreclosures, short sales, deed in lieu, etc.
Student loans in default.
HOA payments etc.
Down payments- 401k, gift funds, Down payments assistance or prongs w o down payments = USDA, VA, FHA, and grants.
So there you have it! These are some of the factors that you must consider when getting ready for your first mortgage. If you have any questions or want to learn more, you can always cash in on your Free CIG Consultation to discuss your situation with a specialist, or you can browse our Education Library.