If you’re hoping to buy a house some time in the new year, you may be tempted to just dive right into the process and start going to open houses. But that could end up being a costly mistake.
Before you get ready to make your purchase, you need to get your financial ducks in a row — and take some time to think about the big financial commitment you’ll be making by taking out a mortgage loan.
To ensure you’re ready to move forward with the home purchase process, here are a few steps to start working on now.
1. Get your credit report in good shape
When you apply for a home loan, mortgage lenders are always going to be focused on checking your credit. They’ll want to see that you have a good credit score, don’t owe too much, and have been responsible in borrowing money.
If lenders see red flags on your credit record, such as using most of the credit available to you or making late payments, this could affect your ability to get a home loan. So, start working on presenting yourself as the most credit-worthy borrower possible.
If there are mistakes on your record, file a dispute with the credit reporting agencies to get them corrected ASAP. If creditors are reporting negative information about you that’s accurate, consider writing a goodwill letter to ask them to remove it.
If you spot high debt balances, you can also try to pay those down — or ask for a credit line increase, which can make it immediately look like you’re using less of the credit available to you. Refrain from opening new credit card accounts or taking on other new debt, though, as this can make qualifying for a mortgage harder. When the time comes speak with our trusted mortgage advisors from Stanford Mortgage and they will be able to assist you with the right loan for you.
2. Bulk up your down payment and emergency fund accounts
While you can purchase a home with VA benefits with no money down or FHA with 3 1/2% down having a larger down payment will help you qualify for a loan. 20% down payment when purchasing a home will qualify you for the best loan rates and avoid having to pay for mortgage insurance.
To avoid getting into your house and immediately having to borrow for unexpected expenses, you should also consider saving an emergency fund with three to six months of living expenses before you make an offer on a house.
3. Set a budget for yourself
Set a budget for yourself based on how much wiggle room there is in your monthly expenses. You have other financial goals (which could range from paying for your kids’ college or saving for retirement to traveling the world). The bank doesn’t care about those goals — but you do. And you don’t want to borrow so much that you can’t afford to accomplish them.
When you decide how much you’re comfortable spending, this should dictate how much house you can buy. If the bank offers to give you a larger loan, just say no and borrow the amount you feel OK about.
Of course, if you want to borrow more than your lender says you can, this isn’t going to work out and you’ll need to rethink your budget or increase your credit score and income before trying to borrow your desired amount.
4. Start making a practice mortgage payment
Finally, you should “practice” making your mortgage payment. For example, if your rent is currently $1,500 a month and your total housing costs will be $2,000 per month, then set aside the extra $500 in savings. See how it feels to live with a $2,000 monthly housing payment before you commit to one.
If you take these four steps now, you should be well on your way to achieving your dream of becoming a homeowner in 2023.