Buying your first home is certainly exciting, but it can also be nerve-wracking if you aren’t prepared. The two main things you’ll need to think about are your overall credit. Here are the steps involved in creating a financial plan to make buying your first home simple and relatively painless.
#1 – Obtain a Copy of Your Credit Report
Getting a mortgage is undeniably the most difficult part of the home-buying process. Over the last several years, lenders have become increasingly strict when it comes to extending credit, and if they have reason to believe that there is any risk at all in lending to you, you may not be able to obtain a mortgage. Anything but an “excellent” credit rating may also result in high interest rates, too. Obtain a copy of your credit reports (they’re free once per year) from Experian, Transunion, and Equifax, and review them carefully.
#2 – Pay Off Old Debts and Have Misinformation Removed
Although everything on your credit report is important when it comes to buying a house, the following three things will play the biggest roles in the process.
- Debt-to-Income Ratio: This is the difference between the amount of money you make and the amount of money you owe.
- Credit Utilization: This is the difference between the amount of credit you have available to you and the balances you carry.
- Overdue Accounts: These may include payments you’ve missed, write-offs, and any other overdue account.
You may find things on your credit report that have been paid long ago, or even items that you don’t recognize. If this is the case, contact the credit bureaus to start the dispute process.
#3 – Decide How Much You Can Afford
There are loan calculators everywhere that can give you some idea of how much you can afford when it comes to the value of a home. Most people determine the monthly payment they want and then input an interest rate slightly higher than the one they qualify for. As an example, assume you want a mortgage payment of $800 or less, and you’ll probably qualify for 4% interest on a 30-year mortgage. Your budget would allow you to purchase a home that is valued at $187,000 if you save a 15% down payment.
#4 – Finish Saving Your Down Payment
Finally, if you want to get the best possible interest rates for your mortgage, you should save a down payment of between 10% and 20% of the value of the property you want to purchase. For example, if your budget for a home is $189,000, then you’ll need to save anywhere from $18,900 to $37,800. While it is possible to take out a loan to cover your down payment, lenders prefer to see it come from your own personal savings rather than from another creditor.
If you’re worried about your ability to get a mortgage with a low interest rate, be sure that you take the time to go over your credit report with a fine-toothed comb and take care of any potential negatives you see. Lenders will consider just about everything when it comes to assessing risk, and the lower their risk, the better your chances.