It’s nearly a new year, and if one of your goals is to buy a home in the coming months, it’s time to start making a plan. It’s a good time to buy in many ways, especially because interest rates are low and will likely stay that way for a while.
There are a few things you can do right now so that when you find the right home, you’re ready to go. A little preparation goes a long way, especially in a fast-moving housing market like ours.
Check Your Credit
Credit impacts everything when it comes to buying a home, so it’s a good idea to check yours to see where it stands. Go to annualcreditreport.com, which allows you to request a free credit report from TransUnion, Equifax, and Experian (the three major credit bureaus) once a year.
You should look the reports over carefully for any mistakes or errors, and if you find any, report them to the bureaus right away to be fixed. Typically, reporting the issue to one credit bureau will fix the error at all three, but it’s worth following up to be sure (also, it’s normal to not have all the same information on all three reports).
The good news is that checking your own credit doesn’t ding your credit score in any way, and doing so won’t affect your ability to buy a home.
Know the Major Credit Score Factors
Credit scores are made up of different factors that determine your credit worthiness, and each factor has a different weight.
The main factors that impact your credit are:
- Length of credit history (15%)
- Credit mix (10%)
- Recent credit (10%)
- Payment history (35%)
- Credit utilization ratio (30%)
The more favorable these factors are, the higher your credit score will be. A higher score greatly increases your odds of getting a loan. Plus, the better your credit score is, the better your interest rate is going to be, as well.
Avoid Making Large Purchases with Credit
When you apply for a loan, lenders look at your debt-to-income ratio (or DTI). Your DTI shows them how much debt you have compared to how much income you have, and if that number is too high, it may be difficult or impossible to get a home loan.
This is why you should avoid large purchases on credit before you get a home loan. If you want to finance a new car or furniture for your home, do it after your loan has closed. Otherwise, you may pass the acceptable DTI threshold, and your loan may not close, even if you were pre-approved.
Make a Savings Plan
Buying a home comes with costs like a down payment (usually between 3.5% and 20% of the purchase price), closing costs (around 1 to 3% of the loan amount), and other expenses. It’s also smart to have some money set aside for a small emergency fund for your home. It can be hard to save up the money, but the good news is that a little planning can go a long way.
Here are a few strategies:
- Set aside the difference between your rent payment and your new mortgage payment. Not only will this ensure that you’re comfortable with your new mortgage payment, but it will also help you build a nice nest egg for your down payment.
- Save any bonuses or tax return money for your new home.
- Automatically transfer a fixed amount into a savings account each month. Treat it as another bill, and you won’t even think about doing anything else with that money.
- Get a second job or do some freelance or gig work to pad your down payment fund.
- Reduce high-interest debt. High-interest debt takes up a lot of your monthly resources. Consider paying that debt down and putting the savings toward your home.
- It might be obvious, but cutting your expenses is one of the quickest ways you can save more. It’s a pain, but having your own home is worth it!
Get Financial Documents in Order
When you apply for a mortgage, you need a LOT of financial documents to get the job done. Since you’ll likely be thinking about filing your taxes soon and will need much of the same paperwork handy, think about organizing it all now. That way, when it’s time to apply for a mortgage, you won’t have to round it all up again.
To apply for a mortgage, you’ll need:
- ID and social security number
- W-2s or I-9s from the past 2 years
- Proof of any other regular income
- Federal tax returns from the past 2 years
- Bank statements from the past 2 years
- Pay stubs from the past 30 days
Get Pre-Approved with a Mortgage Lender
When you’re thinking about starting to shop for homes, get pre-approved with your lender. During the pre-approval process, they’ll go through your financial documents and pull your credit to decide what they might be able to lend you. You’ll get a pre-approval letter at the end, stating how much money you are pre-approved for.
While this isn’t a commitment to give you a loan, a pre-approval shows that a lender thinks you can purchase a home, which can make a big difference to sellers in a competitive market like ours.
Hire a REALTOR®
Last, but certainly not least, it’s time to hire a real estate agent. The best part is that this is at no cost to you—the seller covers the agent’s commission.
So, interview an agent you want to work with (and of course, we think it should be someone from the Alexander Group)! Here are some things to ask during your interview:
- What do you know about the neighborhood I want to buy in?
- How long have you been in the business?
- What sets you apart from other real estate agents?
- How wide is your professional network if I need contractors?
- How often and in what methods will you use to communicate with me?
- Can you give me some client references?
Above all, make sure you feel comfortable with the agent you choose. For a while, you’re going to be very close! It’s important that you mesh well for the best possible experience while buying your new home.
Hiring a real estate agent, even if you’re not quite ready to buy yet, will ensure that you’re on the path to success. It’s never too early to get started if you’re thinking of buying a home. If you’re ready to start the process, give me a call at (765) 543-5947.