It can take almost a full year to get your finances in line before you buy a home, housing experts say.
So if you know you want to buy a house within the next six months or so — such as people hoping to make the leap in the spring — you should start your financial housekeeping now.
Preparing sooner rather than
later can increase your chances of landing the lowest interest rate
possible, which can lead to thousands of dollars in savings over the
life of the loan. People who skip some of these steps may miss out on
their dream home or delay their plans.
Here is a checklist of sorts to give you your best shot at landing a good deal:
Know your budget. Before you start browsing real estate listings, talk to a lender to get a sense of what you may be able to afford. After reviewing general information about your finances, such as your income, assets and debt, the lender can give you a pre-qualification letter, which says how big your potential mortgage could be. This information can help you figure out what price range you should target and what neighborhoods you can buy in, says Keith Gumbinger, vice president of the mortgage information website HSH.com. But keep in mind that the pre-qualification letter doesn’t guarantee the loan. This can also give you more time to make tough decisions about what you absolutely want in a home and what you can do without, Gumbinger says.
Use the letter to start calculating other expenses. Estimate what closing costs might be, based on that price range, says Ray Rodriguez, a regional mortgage sales manager for TD Bank. (Closing costs are typically a percentage of the purchase price.) Potential home buyers should also research what property tax rates are in the neighborhood they’re considering, Rodriguez says.
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Check your credit report. If you haven’t checked your credit report in the past year, you definitely want to take a look now. Consumers can receive three free credit reports a year, one from each of the main credit-reporting bureaus, on AnnualCreditReport.com. Make sure that all of the loans and accounts listed under your name actually belong to you and that the account balances are accurate, Rodriguez says. (A $10,000 bill for a credit card you know you paid off would be a red flag.) It can take several months to have an error removed from your credit report. So the earlier you look, the more time you give yourself to fix the problem before you start applying for loans, Rodriguez says.
Maximize your credit score. Boosting your credit score can increase your chances of being approved and help you land a lower interest rate on your loan, says Jonathan Smoke, chief economist of Realtor.com. Consumers may have a hard time being approved for a mortgage if their credit score is below 625, Smoke says. “If it’s lower than that, it puts you in a position where probably all the work you’ll do is getting credit counseling,” he says. Consumers with credit scores above 700 can qualify for lower interest rates, and the best offers are available to people with credit scores of 750 and up, he says.
You can lift your score by establishing several habits in
the months leading up to the purchase, housing experts say. The first
thing to do is to make sure to
pay your bills on time, since
payment history is the No. 1 factor that goes into a person’s FICO
score. It also helps to bring down the balances on credit cards to below
30 percent of the available credit. Most people should also hold off on
opening or closing credit cards until after they’ve purchased the home,
Rodriguez says. Applying for a new card requires a credit check, which
can ding your credit score. And closing a card can also lower your
credit score by reducing your credit history or making it seem like you
are using a larger share of your total credit.
Figure out what your down payment should be. Chances are you already have some money saved if you’re expecting to buy a home in the next six months or so. Some buyers in competitive housing markets may benefit from providing a larger down payment. But don’t assume you need to give 20 percent down. Some people can make smaller down payments if they qualify for certain programs, such as those offered to veterans and first-time home buyers. For instance, mortgages backed by the Federal Housing Administration require down payments as low as 3.5 percent of the purchase price. Those loans, however, may require borrowers to pay for mortgage insurance, which adds to the monthly costs. Some loans backed by the Department of Veterans Affairs don’t require any down payment or private mortgage insurance.
Build a housing emergency fund. Most future home buyers focus on saving for the down payment. But setting aside a cash fund to pay for unexpected home repairs and other emergencies is also important, Rodriguez says. (Once you become a homeowner, there won’t be a landlord to step in when your water heater breaks down.)
Avoid major purchases. When applying for a loan, mortgage lenders may review your bank statements to make sure you have enough money, Rodriguez says. Tighten your spending in the months before you apply for the mortgage so that you can have as much cash available as possible, he says. Big purchases worth thousands of dollars can be especially harmful if they are made with credit or another loan, he says, because they add to your debt load. That could affect your debt-to-income ratio, which can make it harder for you to qualify for the loan.
Shop around. Many home buyers go with the first offer they receive when it comes to mortgages, according to a report from the Consumer Financial Protection Bureau. By not shopping around, borrowers may end up with a higher interest rate when they could qualify for a better deal. You should start requesting quotes 30 to 45 days before you want to buy the house, Gumbinger says. You can request estimates for interest rates and fees from multiple companies at no charge, he says. But you may have to pay a fee when you actually apply for the loan, he says. Compare interest rates and closing fees and negotiate with the lenders to see if they will lower some of those costs or match an offer from another company. Taking a moment to look around can pay off. Someone who sheds 0.25 percentage points off a $200,000 loan could save $10,000 over 30 years, he estimates.
Before you see homes, get a pre-approval letter. Once you’ve chosen a lender, you should request a pre-approval letter, which outlines in more detail how much you might be able to borrow. Unlike a pre-qualification letter, a pre-approval letter tells the seller that lenders have actually vetted your finances and confirmed that you qualify for a loan — giving you a possible edge over buyers who can’t prove that they will get financing. To get this letter, the lender may verify your income, check your bank statements and pull your credit.Court the seller.
By the time you’re in the final stretch and feel ready to make an offer, there are some other steps you should consider to gain an advantage over other buyers. Think about paying for a pre-inspection if you know you’re going to be facing a lot of competition, which could cut down on negotiations needed with the seller and allow you to close the deal more quickly. Beflexible with timing if it will help the seller. Talk to your broker to see what else you can do to increase your chances of landing your home. Sometimes it helps to write a letter about your situation and why that home is perfect for you. But don’t sweat it too much. If you’ve startedpreparing early, you should already be in a pretty good position