Buying a house is one of those huge life milestones you’ll always remember. Even if you have a bump or two along the way, the hope is that you’ll look back on the experience fondly.
While there’s no getting around the fact that moving is stressful, you can keep a cool head and help the process go smoothly by doing some prep work before you start your home search.
Whether you’re buying your first house or adding to a more extensive real estate resumé, here are a few financial preparations that will help you feel prepared (and, dare we say, sane?) during your next home purchase
Strengthen your credit score. The higher your credit score, the lower your interest rate. Start by pulling a free copy of your credit report and making sure there are no mistakes. If you see something that doesn’t look right, fix it. You should also refrain from applying for new credit for a full year before you plan to buy a home. Meaning, hold off on that flat screen TV purchase until after you secure financing.
Figure out your debt-to-income ratio. This will give you an idea of what you can afford so you don’t tempt yourself with homes out of your price range. To do this, simply add up all of your monthly debt payments and divide the sum by your gross monthly income (the amount you make before taxes). For conventional loan approval, it’s advised that your expenses don’t exceed 28 percent of your income.
Get pre-approved for a mortgage. Understanding your limits before you start browsing will help focus your search. Pre-approval for a mortgage will save you from the disappointment of looking at houses you can’t afford and could put you ahead of other buyers when you do find the right home. Note: Pre-approval is based on your actual income, debt, and credit history. It is not the same thing as pre-qualification.
Beef up your savings account. Lenders want to know you have enough money for a down payment and closing costs, but they’ll also want to see that you’re not living paycheck-to-paycheck. Three to five months worth of mortgage payments in your savings account will make you a good loan candidate. Tip: You’ll spend an average of 2.5 percent to 3 percent of your home’s value annually on upkeep, repairs and maintenance, so aim to save that much every month as well.
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