9 Requirements to Buy a House
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C.E. Larusso, Contributing AuthorClose
C.E. Larusso Contributing AuthorC.E. Larusso is a writer, editor and environmental activist based in Los Angeles. She has written about education and climate change pedagogy for Noodle, beauty and sustainability for Mimi, as well as housing and lifestyle for xoJane.
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Fran Metz, Contributing EditorClose
Fran Metz Contributing EditorFran Metz is a freelance content writer, editor, blogger and traveler based in Las Vegas, Nevada. She has seven years of experience in print journalism, working at newspapers from coast to coast. She has a BA in Mass Communications from Fort Lewis College in Durango, Colorado, and lived in Arvada for 15 years, where she gained her experience with the ever-changing real estate market. In her free time, she enjoys 4-wheeling, fishing, and creating digital art.
Dreaming about buying a home, furnishing it beautifully, hosting memorable dinner parties, and creating a perfect back yard for the kids? Before you dive into house hunting, it’s crucial to ensure you meet the essential requirements to buy a house.
We’ve outlined nine key requirements to get squared away before scheduling those showing appointments. By preparing these in advance, you’ll be well-equipped to navigate the home-buying process smoothly and confidently when you find your ideal home.
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1. Steady employment
Generally, lenders will look to see that you’re employed and in a stable position. Ideally, you’ve been working at the same place for at least two years.
During the Verification of Employment (VEO) process, the lender will confirm your current job title and length of employment. They also may assess the stability of your future employment, ensuring there is a strong likelihood that you will remain in your position for the next five years.
If you’re self-employed, don’t fret! You can still get a loan. While it may be slightly more difficult as a self-employed borrower, there are still loans out there for you. They might require additional documentation that typically isn’t needed for standard W-2 employees. Lenders also will rely heavily on your tax returns to verify the consistency of your self-employed income. Plan on providing at least two years of detailed returns.
2. A solid income
In addition to the length of employment, lenders will also review your salary to confirm you’ll be able to pay the loan back.
If you make an annual salary, the lender will divide that amount by twelve to check your monthly take-home pay. If you’re paid hourly, most lenders will take your average number of hours worked per month and multiply that by your hourly wage.
If you make overtime or receive end-of-year bonuses, the lender will take two years of overtime or bonuses and then divide that by 24 to get the monthly average. And if more than 25% of your pay is from commission, the lender will take the average of 24 months of income as your take-home pay.
The process is the same if you’re self-employed. If that’s the case, you’ll likely need to supply an IRS Form 4506-T (a Transcript of Tax Return).
When we spoke to Joe Bourland, a Phoenix-based real estate agent with more than 23 years of experience, he noted that buyers who have recently switched careers (for example, if you worked in construction for 15 years but recently became a personal assistant) also may need to show two years of steady income, with no significant dip in salary that came with the job change.
3. Minimal debt
Debt is just as important as income when you’re applying for a mortgage. It’s measured by the debt-to-income (DTI) ratio, which shows how much of your monthly income goes toward paying off debts. To calculate it, divide your total monthly debt payments by your gross monthly income. For instance, if you make $5,000 a month and have $1,500 in debt payments, your DTI ratio is 30%. Lenders use this ratio to see if you can handle additional debt, like a mortgage, and generally prefer a lower DTI to make sure you can manage new payments comfortably.
Credit use is also key, as it makes up 30% of your credit score. To get the best mortgage rate, you’ll want to keep your debt low. Aim to use less than 30% of your available credit. For example, if your credit card limit is $12,000, try to keep your balance at $4,000 or less. This helps you keep your credit score high and boosts your chances of getting a great mortgage deal.
4. Fair to decent credit
Credit use is just one aspect of your overall credit score. While a high credit score can enhance your buying power — helping you secure a lower mortgage interest rate and possibly qualify for a larger loan — you may not need an exceptional score to purchase a home. Here are some popular programs available for buyers with lower credit scores:
- FHA loan: This loan, backed by the Federal Housing Administration, is offered by traditional lenders. Generally, you’ll need a credit score of at least 580 and a down payment of 3.5%. However, if you can make a larger down payment of at least 10%, you might qualify with a credit score as low as 500. FHA loans require an upfront mortgage insurance premium of 1.75% of the base loan amount and an annual premium of 0.7% for a 15-year loan or 0.85% for a 30-year loan. These premiums often can be included in the loan amount.
- VA loan: VA loans, offered by the Department of Veterans Affairs, are available to veterans, active-duty service members, and eligible surviving spouses. These loans are particularly attractive because they do not have a minimum credit score requirement set by the VA, although individual lenders might have their own criteria. One of the standout benefits of VA loans is that they typically do not require a down payment, with about 90% of these loans being funded without one. This combination of favorable terms and no down payment requirement makes VA loans a compelling option for eligible borrowers.
- USDA loan: Backed by the United States Department of Agriculture, USDA loans are designed for homes located in eligible rural and suburban areas. The minimum recommended credit score for these loans generally is about 640, although some lenders may accept lower scores based on other factors. One of the significant advantages of USDA loans is that they do not require a down payment, making them an attractive option for eligible buyers. By promoting homeownership in rural and suburban areas, USDA loans offer a valuable opportunity for those looking to buy a home without the burden of an initial down payment.
These government-backed loans, such as FHA, VA, and USDA loans, are funded by banks and private lenders. The government agency provides a guarantee for all or a portion of the loan, which helps reduce the lender’s risk and enables them to offer favorable terms to borrowers. This guarantee can include covering a portion of the loan in case of default, which encourages lenders to offer loans with lower down payments and more flexible credit requirements.
For conventional loans, you’ll generally need a credit score of at least 620 and a down payment of at least 5%. A higher credit score can enhance your buying power and potentially secure better loan terms. To improve your credit score to 620 or higher, consider taking a few steps:
- Stay current on all payments by setting up auto-pay
- Pay down existing debt to boost your credit use and overall score
- Avoid applying for new lines of credit unless you’re building a credit history
- Dispute any inaccuracies or negative entries on your credit report
These measures can strengthen your credit profile and improve your chances of qualifying for a conventional loan.
Bourland noted that while medical collections can still appear on your credit report, recent changes have lessened their impact. Lenders may be more willing to overlook medical collections on a case-by-case basis, especially if they are the only negative marks on your credit report. It’s common for lenders to offer exceptions, so it’s a good idea to discuss any medical collections with your lender and review any potential issues.
The key, Bourland says, is to start your process early — pull your credit report a year before you know you’re going to be applying for homes so you can review any negative marks on it and get those handled before you start the home loan process.
In today’s real estate market, lenders may raise their standards for mortgage loans, including minimum credit score requirements, especially in riskier loan environments. Recent economic fluctuations have influenced lending practices, so it’s important to stay informed about current requirements. Make sure to consult with a real estate agent or loan officer who can provide up-to-date information on any changes in credit score thresholds and other lending criteria.
5. A down payment
A common myth is that you need a 20% down payment to buy a home, but that’s not true at all. In 2024, the average down payment for first-time buyers is still about 6% to 7%, while repeat buyers tend to put down about 15% to 20%.
Though you don’t need a large down payment, putting down more money can make you a more attractive buyer. A bigger down payment can demonstrate financial stability to both lenders and sellers, which might help you secure a larger loan amount and increase the range of homes you can consider.
But if you don’t have a 20% down payment, these government-backed programs could be a great option for you:
- FHA loan: The down payment you’ll need for this loan varies based on your credit score; if your score is 580 or higher, you can put down as little as 3.5%. If your score is between 500-580, you’ll likely need a higher down payment of at least 10%.
- VA loan: There’s no down payment requirement for a VA loan.
- USDA loan: There’s no down payment requirement for a USDA loan.
If you want to pursue a conventional loan, but have little money for a down payment, you might still qualify, with a few caveats:
- Higher Interest Rates: If you opt for a conventional loan with a smaller down payment, you may qualify, but the interest rate on your loan likely will be higher. Lenders view borrowers with lower down payments as higher risk, which often results in a higher interest rate.
- Private Mortgage Insurance (PMI): Lenders will typically require you to pay PMI if your down payment is less than 20%. PMI protects the lender in case you default on the mortgage. If your home goes into foreclosure and sells for less than the mortgage balance, PMI covers the difference, ensuring the lender is paid back.
- Low Equity: Starting homeownership with little or no equity can be risky, especially if you plan to move within a few years. Without significant equity, you may owe more on your mortgage than your home is worth if the market declines, which could be problematic if you need to sell.
It’s unlikely that you’ll be able to secure a conventional loan with 0% down, but some lenders will go as low as 3%. Lenders can set their own income and credit score requirements for these loans, as long as the minimums set by Fannie Mae or Freddie Mac — a credit score of at least 620 — are met or exceeded. Also, 3% loans typically are reserved for first-time buyers.
6. Additional savings
Unfortunately, the down payment is still just one part of the total funds you’ll need to close on a home, though it’s typically the largest portion. It’s important to have some extra savings set aside for additional costs, which include:
- Lender and Broker Fees: These fees are capped at 3% of the total purchase price of the home.
- Appraisal and home inspection: Expect to pay $350 to $550 for each, depending on what area of the country you live in, the type of home, its square footage, condition, and more.
- Attorney Fees: In some states, a lawyer is required during closing negotiations. The cost will vary based on the attorney’s rates and location.
- Taxes: It’s common for states to require two months’ worth of city and county taxes to be paid at closing.
- Homeowners Insurance: Most lenders require you to purchase homeowners insurance, and some may ask for the first year’s premium to be paid upfront.
- Title and Escrow Fees: Title or escrow companies handle title insurance and other closing services, so expect fees associated with these as well.
Having a cushion in your savings account can help ensure you’re fully prepared for these additional expenses when closing on your new home.
7. Ballpark idea of how much you can spend
You can’t start house hunting without knowing your spending limit. Setting your budget before getting pre-approved is key to making sure you don’t end up with more financial stress than you can handle. HomeLight’s home affordability calculator is super helpful — you can plug in your income, debts, and bills to see exactly how much house you can afford without breaking the bank.
8. Pre-approval
Getting pre-approved is a crucial step in the home-buying process. It allows the lender to review your credit and income, confirming that you’re eligible for a specific loan amount — something that matters a lot to sellers. Sellers want to be confident that a deal won’t fall through at the last minute, so a solid pre-approval shows them you’re serious and financially ready to make an offer.
However, not all pre-approvals are equal. Some lenders issue pre-approvals based on your estimated information, while others require more details and perform a full verification or underwriting of your credit and financial records. The more thorough the verification, the stronger your pre-approval will be.
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9. A real estate agent
HomeLight articles are a valuable resource for navigating the home-buying process, but having a top real estate agent by your side is even more beneficial. A seasoned agent will have expertise in the area where you’re looking to buy and can quickly alert you to new listings.
Bourland explains how important it is to not only have a knowledgeable, experienced real estate agent by your side, but also one who you can trust: ”Find an agent who’s looking out for your best interest. If you suspect they aren’t, find someone else!”
In addition, an experienced real estate agent likely has seen all kinds of unusual home-buying scenarios, so if you’ve got a unique situation — a little less money down or less-than-perfect credit — they’ll know the best way for you to proceed. Find a great real estate agent on HomeLight today to begin your home-buying journey!
Buying a home is one of the most significant decisions you’ll make, and being prepared with the essential requirements to buy a house can make all the difference. By taking the time to meet these key criteria, you’ll be well on your way to finding the perfect place to call home. With a solid foundation of steady employment, a manageable debt load, and a trusted real estate agent by your side, you’ll navigate the home-buying journey with confidence and ease. Happy house hunting!
Header Image Source: (Étienne Beauregard-Riverin / Unsplash)
- "How To Get A Mortgage With A New Job," Quicken Loans (January 2024)
- "Can You Get a Mortgage If You're Self-Employed?," U.S. News (August 2024)
- "How much of your income should go toward a mortgage?," USA Today (January 2024)
- "What Are VA Loans and How Do They Work? (2024 Guide)," Market Watch Guides (August 2024)
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