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For Sale by Owner Guide

Guide for Buyers

See all Buyer Guide topics

Understanding the Purchase

Basically, you need to have four items to obtain a mortgage

  • Enough stable income to qualify
  • Good credit
  • Enough money for closing costs and down payment
  • An acceptable property to buy

The general requirements are explained in more detail below. Even if you don't fit the mold exactly, there may still be ways for you to buy a home. Our guidelines are fairly general, and there really is a loan program for everyone. Visit our Mortgage Centerfor some options.

Stable Income

Stable income means that you can prove you make enough money every year to qualify for the loan. If you are salaried, a lender will use your gross monthly salary to qualify you. If you are self-employed, commissioned, using bonuses or part-time income to qualify, the lender will average two years income to arrive at a stable number. Alimony and child support can be to used qualify, but you will probably have to prove that you actually receive the money regularly, not merely that you are entitled to it.

Lenders use debt to income ratios to determine qualification. Acceptable ratios change with the loan program. There are usually two ratios used:

  • The "front" ratio: the total amount of the new principal, interest, taxes, insurance (PITI) should not exceed 25-35% of your gross monthly income, depending on the loan program. If you are buying a condo, co-op, or a house that has a homeowner's fee, you will have to add the monthly fee to your PITI to calculate this ratio.
  • The "back" ratio: the total PITI plus all your monthly debts (including car loans, student loans, credit cards, alimony, child support, and other recurring monthly debts) should not exceed 33-41% of your gross monthly income, depending on the loan program.
Generally Accepted Ratios
 Loan ProgramFront Ratio  Back Ratio
 Conventional Conforming  25-30%35-38%
 Conventional Jumbo30-34%36-40%
 FHA Loans28-35%38-41%


Good Credit Rating


If you have a low to moderate income and are buying in a metropolitan area, check for City, County, and State bond programs. Many times, they offer below market interest rates, lower down payments and higher qualifying ratios.

Good credit means you have met all your financial obligations in a responsible manner. Credit reporting agencies report any payments you have made over 30 days late, any outstanding balances that you owe, and any judgments, liens, or bankruptcies that have been filed against you. If you have a few payments that are more than 30 days late on credit cards or student loans, the lender will require an explanation letter and will probably make the loan anyway. However, if you have more than a few late payments, or they were more than 30 days late, you will have to provide specific information about the circumstances surrounding the late payments.

Lenders will consider an explanation for a spell of bad credit. They want to see that the difficulties happened during a specific timeframe, that the borrower has a reason (divorce, loss of job, illness or other life change) and that good credit has been re-established.

Previous late mortgage payments and bankruptcies have specific rules about acceptability. Thus check with a lender who specializes in "less than perfect credit" loans, often called B and C mortgages. Visit our Mortgage Center for more information.

Monthly Payments


First time buyer with no credit history? Create one from payments you have made on time that are not recorded by the credit bureaus. For example, car insurance payments, college payments, phone, cable and electrical bills and child care expenses. Provide the last 12 months cancelled checks or a letter from the person or company you are paying to verify that you made the payments on time.

The monthly payment includes principal and interest on a mortgage, property taxes, homeowner's insurance and any condominium, co-op, or homeowners fees. Go to ourMortgage Center to find calculators to easily figure out what monthly payments will be at today's interest rates.

Cash Payments

You will need cash for a down payment, for closing costs, for prepaid expenses, and for reserves. The money has to be derived from a source acceptable to the lender. Generally, you are not allowed to borrow your down payment or closing costs, except when the loan is secured. For instance, you could borrow against a stock account, another house or a 401K (these are all assets for secured loans), but a credit card is not. (Credit cards are unsecured loans.)

The chart below provides ranges for these costs. However, your costs will change according to the loan program you choose and the locality in which you are purchasing. Don't despair if you don't have as much money as the chart indicates. Read How to Minimize Your Costs . Also, there is a loan program for every need and we are highlighting only the most popular. Visit our Mortgage Center and your local lenders if you have special circumstances.

Type of costFHA(Veterans and spouses only)Conventional conforming and jumbo
Minimum down payment3-5% of the sales priceZERO5% of the sales price


Closing Costs-One time payment of costs to close the transaction


2-5% of sales price   - depending on loan program and local closing costs


 2-5% of sales price - depending on loan program and local closing costs


 2-5% of sales price - depending on loan program and local closing costs


Prepaid Expenses-Amounts you have to prepay to others or have in an escrow account


Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan


Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan


Up to 12 months of property taxes, 14 months of property insurance and two months of PMI and one month of interest on the loan


Reserves-Amount the lender wants you to have after settlement in reserve. The lender doesn't actually collect the money, you just have to prove that you have it. Usually non-liquid assets can be used, such as a retirement account


2 months of PITI


2 months of PITI


2 months of PITI


Acceptable Purchase Property

Lenders are looking at the property as security for your loan. They expect you to repay the loan as agreed, but if you default, they will foreclose on the property and sell the house to make back their loss. For this reason, they appraise the property to determine what it is worth and to establish its condition. Most standard financing requires the property to be in "average" condition, as determined by the appraiser. That means some deferred maintenance is acceptable, but if the house is in poor enough condition to warrant a "below average" rating, a special financing program would probably be necessary. Some indications of potential problems include holes in the floors, walls, roofs, or ceilings, missing appliances, nonfunctioning bathrooms and obvious safety hazards. Other types of property that may fall outside standard guidelines are mobile homes, vacant land, and properties with acreage.

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