How to buy Your Next Home

If you want to buy a home, most likely you're going to need a mortgage. Mortgages can come from banks, credit unions, or other financial institutions. Pretty much any lender is going to want to make sure you meet some basic qualifying criteria before they give you a bunch of money to buy a house.
The specific requirements to qualify for a mortgage vary depending on the lender you use and the type of mortgage you get. For example, the Veterans Administration and the Federal Housing Administration (FHA) guarantee loans for eligible borrowers, which means the government insures the loan so a lender won't face financial loss and is more willing to lend to risky borrowers.

1. Understand your credit score

Your credit score is determined based on your past payment history and borrowing behavior. When you apply for a mortgage, checking your credit score is one of the first things most lenders do. The higher your score, the more likely it is you'll be approved for a mortgage and the better your interest rate will be.
With government-backed loans, such as an FHA or VA loan, credit score requirements are much more relaxed. For example, it's possible to get an FHA loan with a score as low as 500 and with a VA loan, there's no minimum credit score requirement at all.
For a conventional mortgage, however, you'll usually need a credit score of at least 620—although you'll pay a higher interest rate if your score is below the mid-700s.
Buying a home with a low credit score means you'll pay more for your mortgage the entire time you have the loan. Try to raise your score as much as you can by paying down debt, making payments on time, and avoiding applying for new credit in the time leading up to getting your loan..

2. Realize your debt-to-income ratio

Your debt-to-income (DTI) ratio is the amount of debt you have relative to income—including your mortgage payments. If your housing costs, car loan, and student loan payments added up to $1,500 a month total and you had a $5,000 monthly income, your debt-to-income ratio would be $1,500/$5,000 or 30%.
To qualify for a conventional mortgage, your debt-to-income ratio is usually capped at around 43% maximum, although there are some exceptions. Smaller lenders may be more lax in allowing you to borrow a little bit more, while other lenders have stricter rules and cap your DTI ratio at 36%.
Unlike with credit scores, FHA and VA guidelines for DTI are pretty similar to the requirements for a conventional loan. For a VA loan, the preferred maximum debt-to-income ratio is 41%, while the FHA typically allows you to go up to 43%. However, it's sometimes possible to qualify even with a higher DTI. The VA, for example, will still lend to you, but when your ratio exceeds 41%, you have to provide more proof of your ability to pay.
If you owe too much, you'll have to either buy a cheaper home with a smaller mortgage or work on getting your debt paid off before you try to borrow for a house.

Lenders want to make sure the home you're buying is in good condition and is worth what you're paying for it.

3. Figure out your down payment

Most conventional lenders, banks and mortgage brokers, require a minimum 5% down payment, but some permit you to put as little as 3% down if you're a highly qualified borrower.
FHA loans are available with a down payment as low as 3.5% if your credit score is at least 580, and VA loans don't require any down payment at all unless the property is worth less than the price you're paying for it.
If you put less than 20% down on a home with a conventional mortgage, you'll have to pay private mortgage insurance (PMI). This typically costs around 0.5% to 1% of the loaned amount each year. You will have to pay PMI until you owe less than 80% of what the home is worth.
With an FHA loan, you have to pay an upfront cost and monthly payments for mortgage insurance either for 11 years or the life of the loan, depending how much you initially borrowed. And a VA loan doesn't require mortgage insurance even with no down payment, but you typically must pay an upfront funding fee.

4. Proof of Employment

Typically, lenders want to see that you've worked for at least 2 years and have a steady income from an employer. Or, you can show proof of repeatable income levels from even multiple and different employers. If you don't have an employer, you'll need to provide proof of income from another source, such as disability benefits. Either way, the lender wants to see that the income is steady in relation to your expenses in order to show you're able to make the monthly payments in a steady and on going basis. Money from winning the lottery or 'that one weekend in Vegas' does not qualify as income, although it could make a difference in qualifying for the loan. A lump sum can help by increasing the down payment, and thereby reducing the loan amount. This could push the loan amount down into your qualifying range.

5. The value and condition of the home

Finally, lenders want to make sure the home you're buying is in good condition and is worth what you're paying for it. Typically, a home inspection and home appraisal are both required to ensure the lender isn't giving you money to enter into a bad real estate deal.
If a home appraises for less than you've offered for it, you'll usually want to negotiate the price down or, more importantly, walk away from the transaction! Period! There's no good reason to overpay for real estate. Unless of course you're all cash. But then, you wouldn't need to read this if you were.
If the home inspection reveals major problems, the issues may need to be fixed before the loan can close. And, the appraised value of the home determines how much the lender will allow you to borrow.
If you want to pay $350,000 for a house that appraises for only $300,000,, the lender won't lend to you based on the full amount. They'll lend you a percentage of the $300,000 appraised value—and you'd need to come up with not only the down payment but also the extra $50,000 you agreed to pay.