Following the housing crash in 2007, recovery in the market has been uneven, with many buyers held back by stricter lending standards.
But there are signs of life. Banks are beginning to loosen minimum requirements, with several lenders now offering mortgages with down payments as low as 3 percent.
To anyone buoyed by an improving economy and considering taking the leap, I'd recommend the following steps to prepare.
1. Find a mortgage that makes sense for your financial situation.
Look closely at the fine print of the mortgage you're applying for. Buying a home can help you build equity and qualify for tax deductions. Unlocking these benefits depends on getting a mortgage that makes financial sense for you. For instance, a fixed-rate mortgage typically gives you a higher starting rate but also the security that your monthly payments will remain the same, whereas an adjustable rate mortgage's interest rate often starts lower but could spike sharply and leave you scrambling. If you can't find a mortgage that suits your situation, it is best to hold off and revisit the situation at a later date.
2. Student loans aren't a mortgage deal breaker.
According to a report from the National Association of Realtors, almost 60 percent of first-time homebuyers said that student loans delayed their saving for a down payment. Student debt is commonplace enough now that in general, lenders will view it as they do any other debt obligation. Having student debt may not prevent you from obtaining a mortgage if you have used it responsibly.
3. Reduce your debt-to-income ratio.
When considering your mortgage application, lenders often look closely at your debt-to-income ratio. For them, your monthly debt obligations mapped against your monthly income is a good indicator of how comfortably you can take on more debt. As you consider whether to buy a house, it helps to get your credit card balance down as low as possible and to examine consolidating your debts into lower monthly payments.
4. Slow down your borrowing.
Applying for a new credit card or loan initiates a hard pull on your credit report that can lower your credit score, which can then impact your eligibility for a mortgage, or the final interest rate you're offered. If you're thinking of applying for a mortgage, it's best practice to hold off on applying for other new lines of credit in the six to 12 months beforehand. Too many recent credit inquiries can be a red flag, sending the message to lenders that you're desperate for credit.
5. A little self-reflection helps.
Banks have a range of formulas and calculations that they look at when examining your mortgage application, but above all else, they're trying to make an assessment on how well you can be trusted to pay back a loan of potentially hundreds of thousands of dollars. Lenders will review your credit history closely. How you've handled previous debt is the best indicator they have of how responsible you would be with future debt. Think about how reliable of a borrower you've been. Missed payments or accounts in collections are going to give lenders pause. You need to be on your best credit behavior.
6. Educate yourself on your credit situation.
Having a good credit score is crucial to getting a mortgage at a good rate. You may still be able to get a mortgage without good credit, but the structures and rates available to you might leave you paying more than you should. Because of how closely it will be scrutinized, you should definitely look at your credit score and report before a lender does. An FTC study in 2013 showed that as many as 25 percent of consumers have an error on their credit report that could affect their score. Your credit report will help you identify areas of improvement. For instance, credit card utilization rate--the ratio of your credit card debt to available credit--can be a major impact on your score. Something as simple as increasing your credit limit could improve your score before you apply for a mortgage.