How to Prepare to Finance a Home

When you decide you want to buy a home, it makes sense to plan ahead. Here are some tips to get you started. 

Develop a budget.
Instead of telling yourself what you’d like to spend, use receipts to create a budget that reflects your actual habits over the last several months. This approach will better factor in unexpected expenses alongside more predictable costs such as utility bills and groceries. You’ll probably spot some ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.

Reduce debt.
Lenders generally look for a debt load of no more than 36% of income. This figure includes your mortgage, which typically ranges between 25 and 28% of your net household income. So you need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards — down to between 8 and 10% of your net monthly income.

Increase your income.
Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want. And don't think of that income as spending money - it's savings for your down payment.

Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with 5% down or less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20% down payment to save on monthly private mortgage insurance.
Stay at your job.
While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.

Establish a good credit history.
Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off entire balances as promptly as possible.
Start saving.

Besides your down payment, don’t forget to factor in closing costs, which can average between 2 and 6% of the home price.
Know your credit score.
Make sure it is accurate and correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments.
Get Pre-approved for a mortgage. Know what you can afford.Generally, you want to look for homes valued between two and three times your gross income, but a financing professional can help determine the size of loan for which you’ll qualify. Find out what kind of mortgage (30-year or 15-year? Fixed or adjustable rate?) is best for you. Also, gather the documentation a lender will need to preapprove you for a loan, such as W-2s, pay stub copies, account numbers, and copies of two to four months of bank or credit union statements. Don’t forget property taxes, insurance, maintenance, utilities, and association fees, if applicable.

Review options for down payment assistance.
Check with your state and local government to find out whether you qualify for a special mortgage or down payment assistance programs. If you have an IRA account, you can use the money you’ve saved to buy your first home without paying a penalty for early withdrawal.

Thinking of buying or selling? Send me an email through the link on the right. I’d be happy to help you get happily moved to your new home!