Buying a home is perhaps the biggest purchase most people will ever make. That’s reason enough not to blindly take the plunge without preparing yourself for the ups and downs of home ownership. This is especially true when it comes to your finances.
How’s Your Cash Flow?
A good place to begin is by looking at your income. Where does it come from and where does it go? This would be the time to establish a budget and stick to it. Unstable or unpredictable income, and even changing jobs can be detrimental to your loan application, so before you think seriously about applying for a home loan, get this area of your finances in top shape. Lenders will look at your previous two years of income when judging your ability to pay them back.
How’s Your Credit?
Take inventory of your credit. Check your credit reports and scores and look for any discrepancies. Errors on your credit report could adversely affect your FICO score, which could result in getting a less-desirable interest rate on your mortgage loan. According to the Home Buying Institute, you generally need a credit score that falls at least within the 620- 640 range. Those applying for government-backed loans, such as VA or FHA loans, may get approved with a lower score, but even then it will most likely need to be at least 600. Keep in mind that since the housing crisis of several years ago, lenders will now be more inclined to be choosier as to which borrowers will get the best rates, so a score that was pretty good years ago may be just mediocre now. If there are any past-due balances in your credit report, be sure to bring them up to date several months before applying for a mortgage loan.
How Much Debt Do You Carry?
While mortgage lenders will look at your credit score, it’s just one of several pieces of your financial picture they want to see. Another is your debt-to-income ratio. This can make or break your chances of getting a loan if you have a heavy load of revolving debt compared to your gross monthly income.
How Much for a Down Payment?
Ideally, a 20 percent down payment is desirable and can make a lender see you as a serious home buyer. You’ll also reap the benefits of having a lower monthly mortgage payment and will not be required to purchase private mortgage insurance on your loan. A low down payment such as 5 percent won’t give you as many options for loans, and will likely find you paying a higher interest rate, as well as more of the closing costs. If your financial situation is such that you can’t even make a 5 percent down payment, you may want to reconsider buying a home until your savings is closer to that 20 percent goal.
Are You Prepared For the Unexpected?
Even though you may have a 20 percent down payment for your new home, and you’ve been pre-approved for a loan, you still need to take stock of another responsibility of home ownership: being your own maintenance man. As a renter, you only need to pick up the phone to call your landlord or rental office when a pipe bursts or the water heater springs a leak. Do you have enough in savings to cover a possible major repair that may need to be done after you move into your home? This is a step that can often be overlooked in the excitement (and stress) of buying a home, but it could be one of the most important.