Buying a home is a big purchase and a life changing event. Saving for a down payment is a big part, but there are other financial preparations that need to be considered. The majority of home buyers out there do not have all the cash in one lump sum to purchase a home. Most are planning to purchase a home using a mortgage, so knowing how to be financially prepared to buy a home is imperative.
When looking into obtaining a mortgage, you must have a good credit score. Your credit score is a big detail that lenders pay attention to. Lenders determine how risky it would be to lend money by the score of your credit. A low credit score might mean a person will have a harder time or might skip payments on a mortgage. Raising your credit score will help you not only get a mortgage but will also contribute to a lower mortgage rate.
Once you have done this, you can request a free copy of your credit report from the three major credit bureaus. Another one stop place to do this is annualcreditreport.com and they advertise that through the end of 2023 you can request your report more than once. You will want to review your credit report and if there are any errors, you can work on getting them resolved. If there is something on your report by error, this can affect your credit score.
High credit card balances can also put a damper on your credit score as well as personal loans so reducing your debt before applying for a mortgage is important. Paying your debt down will also lower your debt-to-income ratio (DTI). The lower your DTI, the better chance you have of being approved on a home loan application. In fact, close to one third of homebuyers revealed that they did not get approved for a mortgage due to a high DTI according to the National Association of Realtors.
Remember to save for those upfront costs such as closing costs and also have at least three to six months of reserve for expenses on top of that. A down payment is also needed and the higher the down payment, the better the mortgage incentives. When you are figuring this out, it is also a good idea to figure out how much you can afford. This can help you set reasonable saving goals. Follow the 28/36 rule when accounting for this. This means you should spend no more than 28% of your gross monthly income on housing and no more than 36% on your debt payments.
As mentioned before, a down payment can work in your favor. In order for a lender to account money in your bank account as money that can be used for a down payment, it must have been in your account for at least 60 days. If you have money that has been in your account less than 60 days, it can be termed as gift funds.
“Only deposit the gift funds after you have spoken to your mortgage loan consultant. Some lenders want a bank statement from the donor to show they had the funds for 30 days or more, to document they had the funds in their name prior to giving it to you,” says Kevin Walton with C2 Reverse Mortgage Corp.
One thing to avoid if you are currently applying for a mortgage is acquiring more debt. If it is unavoidable and you need to make a big purchase, tell your lender beforehand. “If the lender was informed much earlier, there may have been options available to the homebuyer to permit the loan to still be qualified with sufficient time to resolve everything prior to the settlement date,” says Paul Johnson with Houwzer.
You also want to stay away from any sudden shifts in your financial situation. Examples are changing jobs, buying a car or boat, maxing out your credit cards, closing any existing accounts, spending any of your down payment money, buying furniture, making a huge undocumented payment to your bank account or co-signing for anyone.
Remember purchasing a home can be both complex and stressful. Being prepared and having financial knowledge in your back pocket can help the process run smoothly.