Buying a home is a big step one that should be carefully planned out and prepared for. Ideally you should start preparing yourself and your finances for the purchase about one year in advance. This is the first part in an article series designed to give you a rough home buying preparation timeline. We will first take a look at the things that need to be done the twelve to six months before you plan to buy a home.
The Twelve to Six Month Countdown List
At this point, you know your goal is to buy a home. Now you need to figure out what it is going to take to do so. There are three basic things that mortgage lenders base your mortgage acceptance on: your credit score and history, your debt-to-income ratio, and your assets.
Your credit report is a highly influential document these days. Lenders use it as a reflection of your responsibility with credit sources. They also use your credit score as a gauge of how much risk there are assuming by lending you money. In fact, the interest rate that they will offer you on a mortgage is often directly related to your credit score – the higher your score, the better your rate. So your task is to start now to make your credit score as attractive as possible to lenders. It generally takes at least six months for any credit practice improvements to be reflected in your score, so don’t delay!
First, pull a copy of your credit report and score from one or all of the three major credit reporting agencies, TransUnion, Equifax, and Experian. With your report in hand, scan the document for any blatant errors. Be sure to report these immediately to the credit bureaus to have the information corrected. Next look for reasons by your credit score may be lower than you want. Once you have identified problems areas in your credit habits, it’s time to go to work! The most important factors in improving your credit score include making very punctual payments on all your credit accounts (you may want to consider setting up automatic bill payments) and lowering the balances on all your credit accounts. During the next year you should also steer clear of opening or closing credit accounts, as this will generally bring down your score.
Your income is an important factor in obtaining a home loan. Lenders want to make sure you have a stable, sufficient income to be able to support the mortgage payments. Beyond simply determining your income, lenders will want to know how you are using your income to see whether you could afford the loan. Mortgage lenders often use the 28/36 rule in determining whether or not you qualify for a loan. The 28 part of the ratio means lenders like to see that your total monthly debts are equal to or less than 28 percent of your monthly income. Those debts would include credit card payments, student loans, car payments, etc. The 36 in the ratio means that lenders prefer that your total debts plus your mortgage payment will not exceed 36 percent of your monthly income. Some lenders will be more lenient on these percentages, but they are a good rule of thumb. Starting a year before you want to buy, you should evaluate your debt and make a plan for reducing it to within the 28/26 ratio. Reducing your debt will also improve your credit score!
A third factor lenders will use in determining your eligibility for a home loan is your assets. This next year should be a year of saving. Not only do you need to save as much as possible for a good down payment, but you also have to be prepared to pay for the loan closing costs (which could run anywhere from several hundred to a few thousand dollars.) Once you actually get into a home, there will be plenty of expenses related to the upkeep of the house. Plus some lenders may even require that you have a couple mortgage payments worth of money saved away in order to avoid default for a while if you have some sort of financial crisis or emergency.
Look for the next part of this series that will outline the important preparation steps to take during the three to six months before you buy a home.
This is the second part in a series of articles aiming to help you prepare for the home buying experience. There are many things that need to be done in order to feel confident on the day your home loan closes. The first article detailed the issues to be dealt with during the six to twelve months before you buy, including improving your credit score, reducing your debt-to-income ratio, and saving for all the necessary fees. This article will help you figure out the important steps you need to during the three to six months before you plan on buying a home.
THE SIX TO THREE MONTH COUNTDOWN LIST
Determine Your Price Range
Now is the time to start figuring out just how much house you can afford to buy. While it is great to fantasize about the size and layout of your dream house, you have to determine how much of that dream house can fit into your budget. You should realize that some lenders may be willing to qualify you for a bigger loan than you can truly afford. It is up to you to decide on your financial limits. You may want to use the 28/36 ratio discussed in the last article to calculate how much your monthly mortgage payment should comfortably be. Basically, your mortgage payment plus all your monthly debts combined should be no more than 36 percent of your monthly income. So for example, you earn $5,000 per month. Your monthly debts total $700. Thirty-six percent of $5,000 equals $1800. Subtract your monthly debts ($700) from that total and you have room in your budget for an $1100 monthly mortgage payment. Don’t worry; if all this seems to confusing, almost any mortgage lenders website provides a handy calculator that will do the calculations for you.
Plan for Home-owning Costs
You started your home buying savings plan several months ago, but now you need to calculate just how much it is going to cost to remain a homeowner. Find out how much you will have to pay for property taxes and homeowners insurance. You should also take into account the fact that if you are planning to move into a bigger place, your utility bills will likely be larger as well. You should also plan into your budget and savings plan for various home repairs that will need to be taken care of. Once you figure out the total amount for all these expenses you will have a better idea of what it will cost to maintain your home.
Research the Loan Programs Available
Finally; this is also the time to start studying your options in terms of the various loan products available. Research the differences between fixed rate loans and adjustable rate mortgages. List the pros and cons of each type of loan for your situation. After you understand the basics you can dive into more specific programs. You can consider the choice between a 30-year, 15-year, or even 20-year fixed rate loan. Or you may find that you favor a hybrid ARM loan over interest-only or pay option ARM loans. Once you have discovered your preferences you will be prepared for the next stage of preparation: shopping around for a mortgage.
Stay tuned for the next part in this series that will give you a run-down of the things that you need to do two months ahead to the time the mortgage loan closes.
Are you a first-time buyer with questions about what you should be doing to prepare for homeownership? This is the final part in a series of articles that walks you through the important financial and practical steps necessary to buying a home. The first part discussed how you should examine your credit, debts, and savings plan during the six to twelve months before you plan to buy. The second article detailed the things to be done in the three to six month prior to home buying figuring out how much you can afford, research loan options, and planning for future home owning costs. This article aims to outline the important tasks to be done starting from three months until you plan to buy.
We have already discussed how important your credit report and score are in obtaining a mortgage loan, so now is a great time to recheck your credit and look again for errors that could be corrected before you apply for a home loan. You should also try to find ways to decrease the balances on your existing credit accounts as this will help beef up your score before application time. Of course, continuing to make timely payments during this period is essential to maintaining your credit score, so make sure you stay current in all your accounts.
Another word of caution: do not open or close any credit accounts from this point forward until your mortgage closes. Opening more accounts make it look as if you are desperate for more credit sources, while closing accounts might increase your debt-to-available credit ratio, both of which may pull your credit score down. Don’t do it!
Shop for the Best Lender and the Best Rate
Now is the right time to start shopping around for the right mortgage lender with the right deal. Be sure to research what the current average interest rates are for people with credit scores like yours. Then get quotes from several different lenders and compare the interest rates and fess offered. It is often more helpful to compare loans based on the annual percentage rate (APR) rather than simply on the interest rate because the APR takes into account closing costs, points, and other fees. It is a more accurate reflection of the true cost of the loan.
Once you have found a trustworthy lender, who has offered you good terms on a home loan, you should ask for a letter of pre-approval. This means that the lender has sat down and thoroughly reviewed your income, debts, and assets and is willing to promise you funding up to a certain amount. You can bring this letter with you as you shop for homes. Sellers and real estate agents like pre-approved buyers because they know they are serious and have the funding to make good on their offer.
Shop for a Home
Now comes the exciting step of selecting the right house for your needs. You may want to enlist the services of a real estate agent to help you find the right neighborhood and the home with all the features you are looking for. Once you have located the perfect house, you can place your bid with confidence and proceed on to the loan application process if your offer is accepted. Having done all your homework and carefully prepared for this end goal will make for a much less stressful purchase process!