Remember the days when the only thing you needed to do to buy a home was to bring some I.D. and stand in line somewhere? The days of “E-Z Lending!” and “No Money Down!” have long given way to an era loaded with banks and lenders that actually require that potential homeowners have the ability to pay for the homes they’re trying to purchase. If you’re in the market for a home, you need to make sure that your financials can withstand an underwriter’s scrutiny. Check out the following four money moves that you’ll need to make before even thinking about buying a home.
If you're planning on applying for a mortgage, but your credit scores are barely there, or smudged, you’ll need to put in the work to raise them to a number that lenders are comfortable with. Borrowers with high credit scores are rewarded with lower interest rates and less money required for down payments. Pull your reports from all three CRA’s (credit reporting agencies). Pay down your credit card debt. If you’re thinking of paying off old debt or charge-offs, check with the creditor in question to make sure that once you pay, they report the debt to the CRA's as "paid in full." Paid charge-offs are often reported as “new,” a notation that will result in a lower credit score. Dispute any errors on your reports directly with the CRA’s.
If you're carrying sizeable debt, it’s going to negatively affect the amount of money that a lender is willing to lend you. If you have a lot of revolving debt, pay as much of it off as you can. Not only will it make you more attractive to lenders, it will save you money over time since revolving debt like credit cards carries much higher interest rates than mortgages do. Paying off that money up front will save you thousands of dollars in interest in the long-term.
If you’re going for an FHA loan, the minimum down payment required is 3.5% of the purchase price, provided you have a credit score of at least 580. If your score is lower than that, you’ll need to put down 10% (another reason to get those scores up!). Traditional loans can require as much as a 20% or more down payment. Figure out how much you’ll need for a down payment and aggressively go about saving for it.
You can receive familial down payment assistance in the form of a gift, but make sure that it is accompanied by a “gift letter,” which will include the amount being given, the relationship of the person giving you the money, clarification that it’s actually a gift and not a loan, the property address, and the signatures of all involved parties.
Everyone wants to buy a dream house, but that dream house can quickly turn into a true nightmare if you bite off more than you can chew in terms of house price. Assess all of your monthly expenditures including your monthly take-home pay, outstanding debts, home maintenance expenses, taxes, school fees, utilities, etc. As you can see, the list is long, so when you’re figuring out what you can afford for a monthly mortgage, include all of those other expenses in your calculations.