When you’re ready to become a homeowner, it can be exciting to plan to purchase your first home and look forward to settling down. Buying a house requires a lot of patience and preparation to ensure you make the right decision that is best for your future. Before purchasing a house, there are a few financial steps to take to ensure you’re prepared for getting a mortgage and the expenses that come with homeownership.
1. Pay Down Your Debt
It can be challenging to go into homeownership if you have a lot of debt weighing you down. One of the main factors lenders will review when you apply for a home loan is your debt-to-income ratio. You can calculate your debt-to-income ratio by calculating your monthly debt and dividing it by your gross monthly income. Lenders approve borrowers with less than 36 percent debt, which makes you less of a risk.
Pay down some of your balances on your credit cards, auto loans, and student loans to lower your debt-to-income ratio and become more qualified as a buyer. This will not only allow you to qualify for a lower interest rate but will allow you to afford a home with a higher price tag.
2. Save for a Down Payment
You’ll need to save money for the down payment on your home. The amount of money you need to save depends on the type of home loan you obtain. FHA loans are popular for first-time buyers and only require a down payment of 3.5 percent, which can make it easier to buy a home quicker. A conventional 97 loan allows you to put three percent down, and VA loans don’t require any money down for veterans.
If you want to avoid PMI insurance, save 20 percent to put down, which can allow you to have a lower mortgage rate.
3. Avoid Changing Jobs
Many people make the mistake of changing jobs before and after applying for a home loan. Unfortunately, this can affect your eligibility for a home loan because it shows you don’t have long-term, consistent income. Lenders want to see that you have been at the same job for at least a year to ensure you can make your mortgage payments and are at a lower risk of job loss.
4. Don’t Make Any New Purchases
It’s important to become more frugal when you prepare for a house. Avoid using your credit card, which can increase your debt and can cause your application to become denied. Wait to buy a new car, furniture, or appliances for your new home until after the closing to prevent it from threatening the approval of your application. Stick to using your debit card to avoid any changes in your financial situation.
5. Save for the Closing Costs
You’ll need to save additional money for the closing costs, which are added on top of the down payment that you have to give to the lender. The closing costs are an average of three to 10 percent of the sales price of the home and add up to thousands of dollars. The closing costs include your prorated property taxes, settlement fees, title insurance, municipal lien search, and HOA estoppel. You’ll need to pay it in the form of a cashier’s check at the closing.
Knowing the right financial steps to take before purchasing a house can allow you to feel more prepared and avoid any issues. It will help you to become a more trusted borrower and have a smoother path to owning real estate.