When you’re thinking about making a major purchase, like a new home, it’s never too early to peek at your finances to see if there’s room for improvement.
Spoiler alert: There’s pretty much always room for improvement.
Unless you’re debt-free and you have perfect credit, that is. Assuming you don’t fit this description, it’s time to get busy beefing up your bank account and chipping away at your credit card balances. Not sure where to start? Believe it or not, you may find the key to financial fitness in your future mortgage lender’s office.
Meeting with a mortgage lender one to two years before you’re actually ready to buy a new home can be really helpful in getting you on the right path to homeownership. This first meeting presents a great opportunity to gain a sound understanding of the financial commitment you’re getting yourself into, as well as what you can do to prepare.
Here are a few ways a mortgage lender can help you get a handle on your financial situation and ease you into the home buying process.
1. Your mortgage lender can help you determine whether you have credit problems that need to be solved before applying for a loan. Unfortunately credit report errors are not at all uncommon. A study by the Federal Trade Commission found that about 25 percent of participants discovered at least one significant error on at least one of their credit reports.
If you notice an error on your credit report, it’s important to file a dispute immediately. While about 70 percent of disputes are resolved within 14 days, it can often take longer. Not taking action may have a negative impact on the interest rate you receive when you’re ready to buy a home.
2. Your mortgage lender will determine how much you can afford to borrow by calculating your debt to income ratio. This is the percentage of your monthly income that is spent on debt payments including student loans, auto loans, and credit card debt.
If your total debt is more than 43 percent of your income, you’re unlikely to qualify for a mortgage. Spend the next couple of years paying off as much debt as you can. Chipping away at your student loans and credit card balances will effectively lower your ratio before it’s time to apply for a loan.
3. Your mortgage lender can help you determine how much you need to save for a down payment. And, the earlier you start saving, the easier it is to come up with enough cash.
Just take it from first-time homebuyer, Trent Hamm. He and his wife didn’t start worrying about saving up for a down payment until it was too late. “We had to get a mortgage for more than 80 percent of our home’s value,” Hamm said. “If we had been on the ball even two years earlier, we wouldn’t have had to do that.” Not only will a bigger down payment mean you’ll have to borrow less money, it could also help you qualify for a lower mortgage rate.