So You Want to Buy a House Together - 3 Things to Know
Congratulations! You guys have decided to buy a home together…things are looking up! If both of you want to be on the loan, here are three quick things to know to increase your chance at getting approved.
Your Credit: When purchasing a home together, the lender will use the lowest of the two mid scores as the qualifying score. Both of you have three credit scores, one from Equifax, one from Experian, and one from TransUnion. When the lender pulls your three scores, they will discard the highest and lowest scores and use the middle (mid) score as your qualifying score. They will complete the process with each of you. When they have the two mid scores they will use the lowest of the two scores as the qualifying scores. What this means for you: you both need to have a minimum of 580 (that’s the lowest score for FHA) but honestly, you want your score to be at least 620 or higher. So start taking care of your credit now. Pay your bills on time, use less than 30% of the credit available to you and monitor your credit for fraud. Those three numbers will determine if you will be qualified and your interest rate.
Your income + Debt: Because two people will be used on the loan that’s double the income if you’re both working. Hey, hey, big house! Your debt to income ratio is still important to the lender. The lender is primarily concerned with mitigating risk; they want to make sure that you’ll pay them their money back. The debt to income ratio tells them how much of your monthly gross income is allocated to current and anticipated debt (buy the Home Buying Guide + Planner for a DTI breakdown and worksheet!). A good rule of thumb here is to keep your debt to income ratio below 50%.
Your Taxes: The lender will look at your paystubs, W2s, and your taxes. They will actually order a tax transcript from the IRS. This is important for those of us who are entrepreneurs, are self-employed, or claim a lot in deductions. The number that is listed in the Adjusted Gross Income box is the number they will use as your qualifying income. If you earned $100,000 and claimed $60,000 in deductions, the lender will use $40,000 as your qualifying income. Lenders will look at the previous two years of tax returns, so plan accordingly.
Alright, there you have it! Three solid tips to get you going in the right direction. Are you hungry for more info? Purchase your copy of the Home Buying Guide + Planner for more information and worksheets.
Happy house hunting!