You can’t just plunk down your credit card to buy a house. Here’s how to prepare for the purchase.
1. Check your credit report. The credit scores that mortgage lenders use to set terms and interest rates are calculated using information on your credit report. You can see what information banks will get by pulling your credit report from the three major bureaus: Equifax, Experian and TransUnion. If you haven’t asked for your reports in the last 12 months, then it should be free to do so at annualcreditreport.com. Comb through each report to make sure each account is yours and the details are correct. Follow each bureau’s instructions on how to fix any errors.
2. Determine your budget. Make sure you know how much you want to spend on your home. The rule of thumb is to not spend more than 30 percent of your gross income on housing expenses, including taxes and insurance. Use an online calculator like this one from Zillow to help figure out how much house you can afford.
3. Get your down payment sorted. Figure out how much you’ll be putting toward the purchase of your house and where that money is coming from. If the money for your down payment is in different accounts, consolidate the cash into one savings account at least three months before you buy a home. That way, you can avoid having to show extra documentation to your mortgage lender to track where the down payment originated from.
4. Prioritize your wants and needs. Once you know how much you can spend, figure out what home features are the most important to you and which ones you can compromise on to stay within budget. Consider location, neighborhood schools, commuting time and nearby amenities like restaurants, grocery stores and nightlife. Also, think about house features. How many bedrooms and bathrooms do you need? What about a garage? Can you deal with a cheaper fixer upper or would you rather not have to do renovations? Once you have a priority list, it’s easier to strike off a potential house that doesn’t meet your top needs or wants.
5. Pay your bills on time. Be extra vigilant about paying your bills on time in the months leading up to your home purchase. Pay down any big balances on credit cards, too, if you can sacrifice the extra cash. Avoid ballooning those balances even more. You don’t want your credit score to slip before you close on a mortgage. If your score does fall meaningfully, your mortgage lender may adjust the terms or rate of your home loan to reflect that.
6. Don’t make any other financial moves. If you’re in the market for a car, wait until after you close on your house. Similarly, avoid opening new credit cards or applying for any other credit. If a mortgage lender sees that you’re seeking other kinds of debt, the lender may consider you a riskier borrower and offer less attractive terms or rates.
7. Get a pre-approval or conditional mortgage commitment. Make yourself the most attractive buyer by having a pre-approval or conditional mortgage commitment in hand. This tells a seller that not only are you serious about buying, but that a mortgage lender is ready to provide a home loan to close on a purchase. That may be enough to help you win a bidding war.
We can help you prepare to buy a home in 2017. Just give us a call today! (586) 685-1323