How to financially prepare for the purchase of a house | Mortgages and advice
Getting to a point where you feel emotionally and mentally ready to buy a home can be a journey in itself. But your work doesn’t stop there.
Most homebuyers don’t have a lump sum that they can use to buy a home in one cash payment. Instead, buyers generally need mortgages. To easily get the financing you need, learn how to prepare yourself financially for buying a home.
Improve your credit score
When you apply for a home loan, your credit score and other application details must meet the lender’s requirements. The lender will look at your credit reports and credit scores to determine how risky it would be to lend you money and how likely you would be to pay off the mortgage debt.
Raising your credit score can help you access competitive financing options. Many credit card issuers and banks provide free credit scores.
After seeing how your credit score is doing, request a free copy of your credit report from each of the three major credit bureaus through AnnualCreditReport.com. Until the end of 2023, you can request new reports every week, if you wish.
When you receive your reports, review the information carefully and dispute any errors with the credit bureau that issued the report. Fixing errors can improve your credit score, as can actions such as reducing your credit utilization rate and paying on time.
Pay off your existing debt
If you have high credit card balances, personal loans, or a large amount of other consumer debt, consider reducing what you owe before applying for a mortgage. This will lower your debt ratio.
A low DTI can increase your chances of getting your home loan application approved. Nearly a third of homebuyers cited their DTI as the reason the mortgage lender rejected their application, according to a 2022 report from the National Association of Realtors.
Specific DTI requirements vary by lender, so there is no universal number. However, the lower your DTI, the better.
Save for initial costs
When you buy a home, you must have funds to cover closing costs. On top of that, plan to have enough cash reserves to cover three to six months of expenses. You’ll also usually have to pay a down payment, although there are some loan programs that don’t require you to pay anything.
Knowing how much you can afford can help you set reasonable savings goals. To get an idea of this, you can use tools such as mortgage calculators. You can also apply the 28/36 rule, which states that you should not spend more than 28% of your gross monthly income on housing costs and no more than 36% on debt repayment.
Prepare your deposit
Saving a large down payment is an accomplishment worth celebrating. But be sure to prepare your funds in order to avoid problems with your application.
Lenders generally consider funds that have been in your possession for at least 60 days to be “seasoned” and therefore usable for your down payment. home buying process.
If you’re using funds that haven’t been in your account long enough to be seasoned, be prepared to provide documentation explaining the sources of the money. For example, you’ll need a gift letter to account for unseasoned gift funds, according to credit bureau Experian.
Knowing the rules for receiving cash gifts is key to qualifying for a loan, says Kevin W. Walton, residential mortgage originator at C2 Reverse Mortgage Corp. who has over 33 years of experience in home loans.
“Only deposit gift funds after speaking to your mortgage advisor,” says Walton. “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 before giving them to you.”
There may be consequences for mishandling donation funds. “If it’s cash kept at home or ‘mattress money’ and you accept the donor’s cash deposit, not knowing you needed a bank statement, those funds may be disqualified. (to) be used for the transaction,” Walton said.
Avoid money-related changes
When applying for a mortgage, and especially when closing on a new home, avoid taking on new debt. Loading $2,000 on a credit card for a new outdoor patio set or taking out a $10,000 personal loan to renovate your future space isn’t a good idea and can complicate the loan process.
If you need to make a major personal purchase, it’s essential to communicate with your lender ahead of time, says Paul Johnson, specialist buyer’s agent at real estate and mortgage brokerage Houwzer.
“If the lender had been notified much sooner, the buyer could have had options to allow the loan to still qualify with enough time to resolve everything before the settlement date,” Johnson said. Failure to notify the lender in a timely manner “essentially ties the lender’s hands”.
Staying away from sudden and significant financial changes can help you have a smooth closing experience. Mike Hardy, managing partner at Churchill Mortgage, recommends borrowers avoid changes, including:
- Changing jobs, including becoming self-employed.
- Buy a car or a boat.
- Maximize your credit cards.
- Closure of all existing accounts.
- Spend your down payment money.
- Buy any piece of furniture.
- Make large, undocumented payments to your bank account.
- Co-sign for anyone.
Estimate your future expenses
There are many expenses associated with being a homeowner. This can come as a surprise if you’re going from renting to owning.
Property taxes are an important expense to anticipate. You can contact your local assessor’s office to obtain the home’s assessed value for tax purposes, and your final disclosure will also contain property tax information.
“Ask your agent if they expect council taxes to be reassessed in the near future, or if (the) city has major municipal projects underway that would cause council taxes to increase significantly,” says Christa Kenin. , a lawyer and a real estate agent at Douglas Elliman, a luxury residential real estate agency.
Additionally, Kenin reminds homebuyers to consider other recurring expenses, which may include:
- Owners association fees.
- Home insurance.
- Lawn care.
- Replacement or repair of devices.
- Increased utilities, such as higher heating and cooling costs.
If not, how should you prepare to buy a house?
Buying a home can be a complicated and stressful process, especially for first-time home buyers. Preparation can help the experiment run more smoothly, allowing you to finish on time with as few problems as possible.
In addition to preparing your finances, other steps include considering different loan options and finding a lender that will meet your needs.