Info for Homeowners, sellers and/or home buyersMortgage, Credit, Financing, Buying a Home March 8, 2023

Are you Mortgage Ready?

Are you Financially Prepared to Take Out a Home Loan?

You feel ready to own your own home, but are you financially ready for a mortgage? If you want to know how close you are to being able to take out a home loan, you’ll want to consider how your credit, debt and recent financial history stack up and what steps you may need to take to improve them.

Where Do My Finances Stand?

Mortgage-ready homebuyers typically have similar financial profiles. This often means:

  • Higher credit scores.
  • Lower debt-to-income (DTI) ratios.
  • No foreclosures or bankruptcies in the past seven years.
  • No severe delinquencies* in the past 12 months.

Depending on your financial profile, you may be mortgage readynear mortgage ready or not currently mortgage ready, based on basic underwriting standards Freddie Mac used in a 2021 analysis of the mortgage readiness of young adults. The below chart offers a quick look at how these factors may affect your mortgage readiness.

Mortgage Ready (All of the following) Near Mortgage Ready (All of the following) Not Currently Mortgage Ready (Any of the following)
Credit Score 661 or higher 600-660 599 or less
DTI ratio 25% or less 25% or less Greater than 25%
Foreclosures or bankruptcies in the past 84 months No No Yes
Severe delinquencies* in the past 12 months No No Yes

*Severe delinquency defined as mortgage payments more than 120 days overdue.

If you are not mortgage ready today, that’s OK. You can take steps to improve your finances over time.

What Can I Do About My Credit Score?

Your credit score summarizes your credit profile and predicts the likelihood that you’ll repay future debts. Credit scores change often, as does the information in your credit history.

If your credit score puts you in the near mortgage ready or not currently mortgage ready group, here are steps you can take to build your credit history and improve your score. These include:

  • Paying your rent on time and working with your property manager to make sure these payments are being reported to credit bureaus.
  • Paying your credit cards, student loans and car payments on time.
  • Keeping your credit card balances low. Pay your credit card bill in full, if you can.

If you need to build or rebuild credit, be patient. The best practice is to review your credit regularly and manage your credit wisely over time.

What Can I Do About My DTI Ratio?

Your DTI ratio shows how much of your monthly income you’re using to pay your debt.

To calculate your DTI, divide your total recurring monthly debt (your rent and any auto loan or credit card payments) by your gross monthly income (the total amount you make each month before taxes, withholdings and expenses).

For Example:

  • Rent is $1000/month
  • Car Payment is $300/month
  • Minimum credit card payment is $200/month
  • Total Recurring monthly debt is: $1000+$300+$200=$1500

If your Gross Monthly Income is $6000/month, then your DTI is $1500/$6000 = 25%

If your DTI ratio is keeping you from being mortgage ready, you can work toward reducing your debt with the help of education tools and resources, including Freddie Mac’s CreditSmart®.

You should also consider working with a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD) to learn about financial literacy topics, such as credit restoration, budget management and other principles.

What Can I Do About Foreclosures, Bankruptcies or Delinquencies?

If you’ve gone through foreclosure or bankruptcy, or you’ve had trouble paying for your housing, working with a certified housing counselor can help improve your financial picture.

Free phone assistance from HUD-certified housing counselors is available at 877-300-4179, or you can use one of Freddie Mac’s Borrower Help Centers.



Rupa Nunamaker
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