Buying a house is a huge financial decision. Taking the time to get your finances in good shape before you start shopping for a home can make all the difference in whether or not you get approved for a loan and how much you’ll pay for financing. To that end, here are three tips to help you make sure that your finances are in the best shape possible.
Build up your credit score
When you’re ready to be approved for a home loan, your credit score is one of the most important financial factors that the mortgage company will consider. After all, your score is an indicator of how likely you are to pay back your debts.
With that in mind, it’s a good idea to try and get your score as high as possible before applying. Doing so will boost your chances of approval and can help you save money in interest over the life of the loan.
The first step to improving your score is making your payments on time. Payment history accounts for approximately 35% of your overall score and is the weightiest factor. Beyond that, it’s best to try and pay as far above the minimum payment as possible. Credit utilization, which is the measure of your total available credit vs how much you’ve used, counts for another 30% of your total score, so it’s best to keep the amount you owe as low as possible.
Save for a down payment
Next, it’s a good idea to save up for a down payment. While there’s no rule stating that you have to put 20% down, (in fact, in most cases, you’ll only be required to put down 3%-5% of the home’s purchase price) generally larger down payments have advantages.
For one, you’ll be viewed as a lower-risk borrower in the eyes of the lender, which may help you score a better interest rate. For another, if you can put 20% down, you can avoid paying private mortgage insurance, which will lower your monthly payment.
As for how to start saving, the best thing to do is to set a manageable goal for the amount you want to set aside and stick to it. Even saving a few dollars a month will add up over time if you’re consistent. If you’re having trouble putting money away, consider setting an automatic transfer into a dedicated savings account.
Consider your debt-to-income ratio
Lastly, take some time to work on your debt-to-income ratio (DTI). In real estate, your debt-to-income rate measures your total monthly income vs all of your outgoing debts. It helps lenders figure out how well you’ll be able to manage a mortgage payment. Typically, lenders look for a ratio of 43% or less.
To find your current debt-to-income ratio, add up all of your monthly bills except for your current housing payment. Then, divide that number by your gross monthly income, which is the amount you make before taxes are taken out. The resulting percentage is your DTI.
If your DTI is higher than you’d like, you have a few options. On the one hand, you can increase your income by looking for a new job, asking for a raise, or starting a side hustle. On the other, you can work toward paying down your debts by making larger or more frequent payments.
Starting your homebuying journey
At the end of the day, it’s important to recognize that preparing financially to buy a house doesn’t happen overnight. A lot of these action steps take time to complete. However, if you put the effort in consistently, it really will make a difference. Sooner or later, you’ll get to a place where you’re ready to enter the market.
When you’re ready, Premiere Nationwide Lending can help you get the loan you need to buy the home of your dreams.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.