Connect with us

Accounting & Finance

First Home Buyer Mortgage Criteria Tips

cash buyer

-timeFirst-time home buyers may wish for a housing market crash or, at worst, a correction, but who can blame them?

Currently, house price inflation is rampant in the USA, and there are bidding wars for single-family homes.

With no end in sight to rising house prices, first-time home buyers need to know how to meet the criteria for a mortgage.


Lenders consider many factors for home loan approvals, and different states and lenders have variations, too.

In this article, we will cover a few of the following criteria.

  • Your credit score
  • Income and employment status
  • Down payment
  • DTI (debt to income)
  • LVR (loan to value)
  • Mortgage Insurance

Coronavirus Pandemic

Mentioning how the pandemic has changed the mortgage landscape is vital, as COVID-19 has changed everything.

Prospective home buyers are questioning whether I should rent or buy. Lenders are making their decisions more manageable as they reassess their lending criteria. For example, USNews reports lenders have tightened their credit score criteria, resulting in low credit score borrowers being out of the property market.

Credit Score

Although 640 is considered a good credit score, most of the financing you’ll get for a mortgage at this credit score will leave you with a high interest rate.

Therefore, building up your credit score until it reaches the 700s is a good idea.

A credit score lower than 640, although it doesn’t say anything about who you are, can look bad on your credit report.

Building it up will allow you to prove your creditworthiness before hunting for a loan and starting the house search.

Some of the ways you can improve your credit score include the following:

Down Payment

Have you got a savings plan? If so, how much do you have for a down payment? The more, the better, of course. Consider a minimum of a 5% deposit or down payment. For example, consider that the average property sales price is $400,000. You will want $20,000 for your down payment.

There are lenders and mortgage products that will allow a lower down payment, e.g., 3% instead of 5%; however, the lower the percentage, the higher the risk, so the interest rate and terms are more favorable to the lender. Even 5% is deficient; ideally, you’d aim for a 20% down payment of $80,000.


If you’re buying in a growth market or boom, i.e., house prices are rising. You will need mortgage insurance if you’ve purchased your home with less than a 20% deposit. This doesn’t need to scare you off, as you can apply to remove it once you’ve got 20% equity in your home.

For example, if you pay $400,000 and have a 10% down payment, but over the next couple of years, your house goes up in value to $450,000, you’ll have a 20% equity stake. Therefore, it’s not always the right move to wait until you have a 20% downpayment unless you’re confident you can save $45,000 each year to have the prerequisite $90,000 deposit to purchase the same home now worth $450,000.

Income and Employment

The pandemic warned lenders to be more vigilant in their income and employment criteria. Proving your income and employment status is critical to securing a home loan. You will need to produce evidence including:

  • Bank statements (2 years)
  • W-2 (2 years) or pay stubs (30 days)
  • Tax returns (personal, business)


Who doesn’t love a good acronym? :). The debt to income (DTI) is how much debt you can have based on your income. A DTI of 3.5 is total debt three and a half times your income. For example, if your annual household gross income (before tax) is $90,000 and you have no debt, your mortgage amount would be 315,000. You’ve probably worked it out – to get a $400,000 home, your down payment would be $85,000 (21.25%).

The loan-to-value rate is the percentage of the sales price that the loan is. For example, if your lender requires an LVR of 85%, you will need a 15% down payment.

Caveat: the information in this article is a guide only and should not be considered financial advice. Always seek professional input from your approved financial advisors, including your accountant.

Summing Up

Lenders do revise their criteria for mortgage products. Do your homework so you’re informed on what type of home loan and the amount you can borrow before getting too excited about homes for sale.

You can start your savings plan and meet the lending criteria for months, if not years, before you need a mortgage, too, so consider your options for how you’d qualify now and what you need to do to get the home you want.

Source Link