Buying a home is quite possibly the largest investment you will ever make. However, before you go to a lender and start filling out an application, there are some things you need to do to make sure you’re approved for your mortgage and you can handle the payments. Here are five things to do whenever you start thinking about buying a home.
#1 – Raise Your Credit Score
If there’s one rule that stays the same in the real estate world, it’s the fact that a higher credit score will always get you a lower monthly payment. Along those same lines, a lower credit score will get you a higher interest rate, if you’re even approved for your loan at all. Pull your credit reports from all three bureaus (you’re entitled to one free report per year from each) and look for inconsistencies or things you can pay off to raise your score. Look at things like credit utilization, and keep your inquiries to a minimum.
#2 – Fix Your Debt-to-Income Ratio
Aside from your credit score, lenders will also look very closely at your debt-to-income ratio. This is the amount of money you owe versus the amount of money you earn. To be on the safe side, your home expenses should not exceed 28% of your gross monthly income. If you make $4000 per month, expenses related to your home should not exceed $1120 per month, which includes your mortgage payment and your homeowner’s insurance. This will give you and your lender a rough estimate of the amount of home you can afford. If you need more home than you can afford, work on putting a bigger gap between your income and the amount you spend on housing.
#3 – Don’t Forget About the Fees
When it comes to buying a home, you’re probably thinking about your down payment and homeowner’s insurance. However, you should also be thinking about the closing costs. No matter how or where you get your loan, you’ll have to pay some closing costs, and these are roughly about 1% to 2% of your loan’s overall value. Sometimes, homeowners will offer to pay closing costs – particularly if their homes have been on the market for a while.
#4 – Save Your Down Payment Early
One of the best things that a young person can do for his or her future involves starting a savings account for a down payment early on. In fact, many people start putting money aside as soon as they finish school. This way, when the time comes to really start thinking about making a purchase, these people have less money to save. The larger your down payment, the better you’ll look to lenders, which could even help you get a better interest rate on your mortgage.
#5 – Get a Preapproval
Last, but most certainly not least, applying for a mortgage is a bit of a paradox. Too many hard inquiries on your credit report reflects negatively on you as a buyer, but the lender will need to check your credit in order to decide whether to lend to you. Fortunately, many lenders offer preapprovals that do not require hard credit hits. It’s quite extensive, in fact, and it can give lenders a pretty good idea about your overall financial situation.
When you’re thinking about buying a house, you’ll need to consider much more than the number of bedrooms you’ll need and how many cars you need to fit the garage. It’s important to take a look at your finances and prepare them for the day you’re ready to apply for your first mortgage.