![Some renters may be ‘mortgage-ready’ and not know it. Here’s how to tell](https://media.nbcsandiego.com/2024/07/108006737-1721139302952-gettyimages-1893843719-image_i3_oh_oakwood_20231023_002.jpeg?quality=85&strip=all&resize=320%2C180)
- In 2022, 39% of the 134 million families residing in the U.S. did not own the home they lived in, according to estimates from the American Community Survey by the U.S. Census Bureau.
- Among those who did not own their home, roughly 7.9 million families were considered "income mortgage-ready," Zillow found.
- Here are two things to know if you're in a good financial position to buy.
Are you ready to buy a home? Many renters have no idea.
Millions of renter households in 2022 would have been able to buy a house that year, according to a new analysis by Zillow, which is based on estimates from the American Community Survey by the U.S. Census Bureau.
In 2022, 39% of the 134 million families residing in the U.S. did not own the home they lived in, according to Census data. Among those who did not own their home, roughly 7.9 million families were considered "income mortgage-ready," meaning the share of their total income spent on a mortgage payment for the typical home in their area would have been 30% or lower, Zillow found.
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Some people simply choose to rent over buying. But on the other hand, households might be unaware they can afford a mortgage, said Orphe Divounguy, senior economist at Zillow.
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If you're coming to the end of your current housing lease, it may be smart to see if you're in a position to buy, said Melissa Cohn, regional vice president at William Raveis Mortgage.
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"If rental prices are coming up, maybe it's a good time to consider [buying instead]," she said.
Getting verbally prequalified from a lender can help, said Cohn. "The first step is trying to understand whether or not it's worth getting all the paperwork together," she said.
But keep in mind that you'll need to go into that important conversation with a working familiarity of crucial facts like your annual income and debt balances.
Understanding the status of your credit and your debt-to-income ratio is a good place to start.
1. There's 'no harm' in checking your credit
In order to know if you're ready to buy a home, it's important to understand what your buying power is, said Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender.
Some would-be homebuyers might have no idea what their credit situation is or are "apprehensive to even check" out of a mistaken belief that it will impact their credit, he said.
In fact, experts say it's important to keep an eye on your credit for months ahead of buying a home so you have time to make improvements if needed.
"That's changed a lot in our industry where we do soft credit verifications upfront now, where it's going to have no impact on somebody's credit score," said Nevins. "There's really no harm in checking."
Your credit matters because it helps lenders determine whether to offer you a loan at all, and if so, depending on the ranking, at a higher or lower interest rate. And typically, the higher your credit score is, the lower the interest rate offered.
That's why being "credit invisible," with little or no credit experience, can complicate your ability to buy a home. But as you build your credit, you have to strike a balance by keeping your debt-to-income ratio in line. Your outstanding debt, like your student loan balance or credit card debt, can also complicate your ability to get approved for a mortgage.
2. Debt-to-income ratio
A debt-to-income ratio that is too high is the "No. 1 reason" applicants are denied a mortgage, said Divounguy. Essentially, a lender thinks that based on the ratio the applicant may struggle to add a mortgage payment on top of existing debt obligations.
In order to figure out a realistic budget when home shopping, you need to know your debt-to-income ratio.
"Your debt-to-income ratio is simply the amount of monthly debt that you're paying on your credit report," said Nevins. "Think car payments, student loan payments, minimum payments on credit cards ... any debt that you're paying and the estimated monthly mortgage payment."
One rule of thumb to figure out your hypothetical budget is the so-called 28/36 rule. That rule holds that you should not spend more than 28% of your gross monthly income on housing expenses and no more than 36% of that total on all debts.
Sometimes, lenders can be more flexible, said Nevins, and will approve applicants who have a 45% or even higher debt-to-income ratio.
For example: If someone earns a gross monthly income of $6,000 and has $500 in monthly debt payments, they could afford a $1,660 a month mortgage payment if they follow the 36% rule. If the lender accepts up to 50% DTI, the borrower may be able to take up a $2,500 monthly mortgage payment.
"That's really the max for most loan programs that somebody can get approved for," Nevins said.
Affordability and financial readiness will also depend on factors like the median home sales price in your area, how much money you can put into the down payment, the area's property taxes, homeowner's insurance, potential homeowners association fees and more.
Speaking with a mortgage professional can help you "map out" all the factors to consider, said Cohn: "They give people goalposts, like this is what you need to get in order to be able to purchase."