Most homebuyers don’t have a lump sum they can use to buy a home in one cash payment. Instead, buyers typically need mortgages. For the smoothest experience getting the financing you need, learn how to financially prepare to buy a house.
[Read: Best Mortgage Lenders.]
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 pull your credit reports and scores to determine how risky it would be to lend you money and how likely you are to repay the mortgage debt.
Raising your credit score can help you access competitive financing options. Many credit card issuers and banks provide credit scores for free.
After seeing where your credit score stands, request a free copy of your credit report from each of the three major credit bureaus through AnnualCreditReport.com. Through the end of 2023, you can request new reports every week, if desired.
When you get your reports, review the information closely and dispute any errors with the credit bureau that issued the report. Resolving errors can improve your credit score, as can steps such as lowering your credit utilization rate and making on-time payments.
Pay Down Your Existing Debt
If you have high credit card balances, personal loans or a sizable amount of other consumer debt, consider reducing what you owe before applying for a mortgage loan. Doing so will lower your debt-to-income ratio.
A low DTI can help your chances of having your home loan application approved. Nearly a third of homebuyers cited their DTI as a reason the mortgage lender rejected their application, according to a 2022 report from the National Association of Realtors.
Save for Initial Costs
When you buy a house, you’ll need to have funds ready to cover closing costs. On top of that, plan to have enough cash reserves on hand to cover three to six months of expenses. You’ll also generally need to make a down payment, though there are some loan programs that don’t require you to put anything down.
Knowing how much home you can afford can help you set reasonable savings goals. To get a sense for this, you can use tools such as mortgage calculators. You can also apply the 28/36 rule, which says that you should spend no more than 28% of your gross monthly income on housing expenses and no more than 36% on debt payments.
Prepare Your Down Payment
Successfully saving up a sizable down payment is an accomplishment worth celebrating. But make sure to prepare your funds so that you can avoid issues with your application.
Lenders typically consider funds that have been in your possession for at least 60 days to be “seasoned” and therefore usable for your down payment.This guideline provides lenders with additional insight about your ability to afford the loan and can help deter criminal activity in the homebuying process.
If you’re using funds that haven’t been in your account long enough to be seasoned, be prepared to provide documentation that explains the sources of the money. For example, you will need a gift letter to account for unseasoned gift funds, according to the credit bureau Experian.
Knowing the rules of receiving cash gifts is essential when qualifying for a loan, says Kevin W. Walton, a residential mortgage loan originator at C2 Reverse Mortgage Corp. who has more than 33 years of experience in real estate loans.
“Only deposit the gift funds after you have spoken to your mortgage loan consultant,” Walton says. “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.”
There can be consequences for dealing with gift funds incorrectly. “If it is cash kept at home or ‘mattress money’ and you accept the donor’s cash deposit, without knowing you needed a bank statement, those funds may be disqualified (from) being used for the transaction,” Walton says.
[Read: Best Mortgage Refinance Lenders.]
Avoid Money-Related Changes
When you’re applying for a mortgage loan, and especially while you’re closing on a new home, avoid taking on new debt. Charging $2,000 to a credit card for a new outdoor patio set or taking out a $10,000 personal loan for a renovation to your future space isn’t a good idea and can complicate the lending process.
“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,” Johnson says. Failing to inform the lender in a timely manner “in essence ties the lender’s hands.”
Staying away from sudden and large financial shifts can help you have a smooth closing experience. Mike Hardy, managing partner at Churchill Mortgage, recommends that borrowers avoid changes including:
— Changing jobs, including by becoming self-employed.
— Buying a car or boat.
— Maxing out your credit cards.
— Closing any existing accounts.
— Spending any of your down payment money.
— Buying any furniture.
— Making any large, undocumented payments into your bank account.
— Co-signing for anyone.
Estimate Your Future Expenses
There are many expenses associated with being a homeowner. This can be surprising if you’re transitioning from renting to homeownership.
Property taxes are a significant expense to anticipate. You can contact your local assessor’s office to get the assessed value of the home for tax purposes, and your closing disclosure will also have information about property taxes.
“Ask your agent if they expect the local taxes to be reassessed in the near future, or if (the) town has any big municipal projects in the works that would cause the local taxes to increase significantly,” says Christa Kenin, an attorney and a real estate agent at Douglas Elliman, a luxury residential real estate brokerage.
Additionally, Kenin reminds home buyers to factor in other recurring expenses, which may include:
— Homeowners association fees.
— Homeowners insurance.
— Lawn care.
— Appliance replacement or repairs.
— Increased utilities, such as higher heating and cooling costs.
How Else Should You Prepare to Buy a House?
Buying a home can be a complicated and stressful process, especially for first-time homebuyers. Preparation can help the experience go more smoothly, getting you toward closing on time with as few issues as possible.
In addition to getting your finances ready to go, other steps include considering different loan options and finding a lender that will serve your needs.
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