Have you decided it's time to buy a home? Before you start popping in at open houses, or searching for your dream home online, there are a few essential make it or break it tasks you'll need to tackle. After all, if you fall in love with a home, you want to know whether it's within your reach.
1. Find Out How Much Home You Can Afford
Unless you are planning on paying cash for your next home, you will need to be able to answer the question, "How much house can I afford?" To answer that question you need to know two things: the total monthly payment you can afford, and how that translates into the price of the home you can afford.
A mortgage calculator can make the math easy — here's a home affordability calculator that will help you crunch the numbers. It will help you understand what you can get based on your down payment, income and debts. Remember it's not just about what kind of mortgage payment you think you can afford; it's also about what a lender says you can afford and they have specific formulas they use to determine that.
2. Check Your Credit
Your credit reports and scores will play a key role in the loan you get. Every item on your credit report must be considered. Balances and monthly payments will count toward your debt-to-income ratio, for example, and any items on your credit report listed as "under dispute" must usually be resolved before you can close on the loan. You need "at least a 620 credit score or more if you want to get a loan and if anything is in dispute, get it out of dispute," says Scott Sheldon, senior loan officer with Sonoma County Mortgages.
If possible, get your free annual credit report at least a few months before you plan to start house shopping, if possible. That will give you time to addresses errors or problems with your credit. Check your credit scores, too (which you can get for free every month on Credit.com). Mortgage lenders may use a different version of the FICO score than the one you get but you can still get an idea of which factors are strong and which ones may cause issues in the loan process.
3. Investigate Mortgage Options
"Educate yourself about your mortgage options," says Chris Birk, Director of Education for Veterans United Home Loans. "The different loan types all come with benefits and potential challenges."
If you don't have a large down payment, for example, you may need to consider an FHA loan which requires a 3.5% down payment, but it may be a more costly option in the long run. Servicemembers and veterans may be able to qualify for a 0% down payment VA loan.
"Don't box yourself in when it comes to potential loan options," says Birk. "Skip past the FHA option if you can spend time building your credit and savings."
4. Get Pre-Approved
The number one thing you should do before you start looking for a home is to get pre-approved for a loan. When you get pre-approved, your loan officer will confirm your credit and loan information, so you'll confidently know what size mortgage you can get. "It's an important indicator to sellers and real estate agents that you're a serious buyer," Birk says, adding that "some listing agents won't even accept an offer on a home without a copy of your pre-approval letter."
5. Don't Do Anything Crazy
If you are serious about buying a home, now is not the time to finance a new car, switch jobs, or make other major moves. Instead, buckle down and keep your finances carefully under control. Your financial documents and your credit will be closely scrutinized both at the time you apply and again before you close, and you want everything to be as squeaky clean as possible. "Don't move money around, especially if you are not willing to show where the money came from," Sheldon says. Lenders will scrutinize every deposit, transfer, etc., and want to know where that money came from, he warns.
Similarly, don't close credit card accounts hoping that will boost your credit scores. It may actually hurt them. And that credit card offer that came in the mail promising 10,000 bonus reward points if you apply right now? You probably want to hold off on shopping for a new card until you close on the home purchase and the loan. Credit repair right before you try to get a mortgage can be risky; you may end up lowering your score rather than improving it.
Checking your credit and getting your finances in order early — before you've already fallen in love with a particular home — is not only smart, it can make buying a home a much more enjoyable process.
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