Financial Preparation for Homebuying

If you’re thinking about buying a home, be sure to prepare for it long in advance; some may want to start working on their financial situation up to a year before home purchase.

Improve your credit score.
Your credit score will be a large factor in whether or not you can get a traditional loan, what rate of interest you’ll pay, and the minimum down payment required on your mortgage. A big improvement can be made in your credit score in a year’s time. Even if you have good credit, you may improve it to get an even better mortgage than you’d qualify for now.Getting a thirty year mortgage for a half percent lower will add up to thousands of dollars in savings over the course of your loan term.

Avoid opening any new credit accounts in the year before buying a home.
This includes credit cards and car loans. New accounts will hurt your credit score, as well as give you opportunity to run up new debt, two things you definitely don’t need just before buying a house. Live within your means and only buy what you have to, and pay cash when possible.

Reduce your debts.
Credit cards, car loans, student loans, and other debts will all reduce the amount of the mortgage you’ll qualify for. Mortgage lenders generally figure you can spend about thirty percent of your monthly income on housing if you have no other debt. If you have other debt, they will reduce the amount of the house payment they’ll approve you for by the amount of those monthly payments you are already paying.

Draw up and follow a realistic budget.
Monthly bill paying doesn’t have to be a juggling act. Get used to following a budget so homeownership will reward you rather than become a burden on you. Too many people have bought a home only to later lose it to foreclosure because they don’t have enough financial common sense to spend within their limits. Practice taking charge of your finances now, so it’s second nature to you by the time you buy your home.

Save money for the down payment, as well as extra for an emergency fund.
If you’re used to paying rent and calling the landlord for emergency fixes, it’s extremely important for you to prepare for those unexpected expenses that every homeowner has to deal with. Appliances break, shingles blow away, and fences need repair. It’s smart to have some money stashed away for those needs so you don’t have to pull out your credit cards and increase your debt every time something comes up.

Pay taxes on all your income.
It happens to be the law, but we all know that not everybody does. Your income is a major factor in the amount of mortgage you’ll qualify for; your mortgage lender won’t count income not claimed at tax time. If you’re used to pocketing a little cash here and there without claiming it as income with the IRS, not only will you lose out if Uncle Sam ever catches on, but you’ll lose out on that bigger mortgage you may have qualified for.

Keep good records.
Mortgage lenders are going to want to see bank statements and pay stubs for up to six months prior to the loan application, and they’ll want to see at least last year’s tax return.Lenders will pull your credit reports and list the debts that show up; those debts might not be updated often enough to show the actual amount owed. If you pay off any of your other debts before you close on your home loan, keep documentation of it if you want your lender to increase your loan amount due to the debt reduction.

Shop around for mortgage lenders.
It’s not too early to start looking, even if you won’t be buying until a year from now. Get a pre-approval based on your current credit, income, and debt situation so you know what you should work on before the time comes. You’ll find out what monthly payments you’ll be looking at, as well as what price range you should be aiming for. You might find that your credit history makes it hard to get a good loan; you can improve your credit to get that better loan by the time you buy your home. You might find that you have so much debt that you won’t be approved for what you thought you could afford; make paying down debts a priority.

Plan to spend what you know you can afford, regardless of the amount you’re approved for.
Lenders use a formula that generalizes our lifestyles and living expenses; you know your life better. You might be approved for a house payment that is twice what you’ve been paying in rent; be sure you can afford it before taking on a big mortgage. Some people like to spend lots of money on entertainment or hobbies; they might be better off with a smaller house payment so they can keep up their lifestyle. Some people enjoy living frugally and really know how to stretch a buck; they might be perfectly okay with a big house payment. You have needs other than just a roof over your head; make sure you can still afford to meet those needs once you own your home.