Tax season is upon us which makes it the perfect time to start thinking about getting your finances in order for a future home purchase. The home buying process actually begins with putting effort into getting your finances in good standing. A good rule of thumb is to start the process up to a year in advance. Begin with the following five steps.
1. Get your credit in order. Your credit score is a large factor in qualifying for a mortgage. The higher the score, the easier it will be to qualify for a loan. Start off by accessing your scores. You can either purchase them directly from the credit bureaus listed below or pay for them as you get your free reports from Annual Credit Report Request Service. Read each report carefully to make sure all information is accurate as errors can significantly impact your ability to get a loan. If there is incorrect information on your reports, immediately dispute it with the bureaus as this process can take several months.
- Equifax – www.equifax.com / 800-685-1111
- Experian – www.experian.com / 888-397-3742
- TransUnion – www.transunion.com / 800-916-8800
2. Get your monthly bills in check. Check your total monthly debt in relation to your income. The bank wants your total debt to be no more than about 30% of your net income. Coming up with a realistic debt-to-income ration will help you know how much you can afford for monthly housing costs (including taxes, insurance and utilities). Pay down your debt as much as possible to increase your borrowing power. Pay down the highest-interest debt first (credit cards) before lower interest debt (car loans, student loans). However, keep some trade lines open as paying them off or closing them can impact your credit score.
3. Know how much you can afford. Once you have your monthly bills in check, determine a comfortable monthly housing payment. Plan ahead by “trying on” your new mortgage. Bank the difference between that and what you’re paying now. Not only will you build your savings, you’ll know exactly if that new payment works for you. If you find yourself struggling to make ends meet each month, you’ll be able to lower that monthly mortgage payment before it’s too late.
4. Prepare for expenses before you buy. Save ahead for pre-purchase expenses. By having a healthy savings account you’ll be able to make that down payment, pay for closing costs and loan fees, have a few months’ worth of mortgage payments in reserve and money for extras like moving costs, furniture, and repairs. Start saving, and save more than you think you’ll need.
5. Consult a real estate professional. The right real estate professional can walk you through all the steps for preparing to buy a home, not only by helping you get ready, but by negotiating the best deal and helping you navigate through financing, contingencies and closing.
With the pre approval process much more extensive than it was a few years ago, planning ahead is crucial to getting the best rate possible. The best thing you can do is to have everything in order. By going through the pre-approval process a year in advance, you’ll learn where you stand. The loan officer can counsel you about what you can do in the next year so that you’ll be ready when you actually apply for a loan. So, use this tax season to see where you stand and let it help you get prepared for buying that perfect home.
