Buying a home is a big financial investment, making it incredibly important to get your finances organized before even starting the house hunting process. But, with so many things to do when preparing to buy a home, where do you even start?
These helpful hints will give you a basic guide to the financial preparation needed before buying a home.
Check your Credit Report
Credit scores are impactful, which is why it’s always important to check your credit report. Interest rates on your mortgage, whether you stand to be prequalified or get preapproved, as well as the amount you are loaned, are all heavily influenced by credit score.
While your credit score may reflect differently depending on the company generating it, you are entitled to one free credit report from the three major credit reporting companies, Equifax, Experian and TransUnion once per year using the federally approved site, AnnualCreditReport.com.
Keep in mind that most mortgage lenders use FICO® scores for lender reliability.
Check your credit report very carefully to make sure there are no errors, or cards listed that you don’t recognize. The U.S Department of Housing and Urban Development (HUD) has counselors available to help you obtain a credit report and review it for errors.
Determine Your Monthly Spending…
There are a lot of costs involved with buying a house, so it is important to have a clear understanding of how much you can put as a down payment, feasibly pay for your monthly mortgage payment, as well as accounting for closing costs.
It’s recommended to review your spending over a period of months to have a strong frame of reference on what your budget looks like to take into consideration how different housing options will fit in with your budget.
…And Use This Information to Help You Determine Your Budget
Your monthly payment after buying a home will include various things – including property taxes, interest, mortgage principal, as well as any insurance such as homeowner or mortgage insurances. These are in addition to utilities paid or potential Homeowners Association (HOA) dues.
Having a clear understanding of your monthly budget will help you take into consideration the affordability of different homes, allowing you to confidently pick a home within your budget.
Gather Your Financial Information and Explore Your Options
Remember that you have options when it comes to finding a lender, so it is good to shop around for a mortgage. Make sure that you understand the different type of loan options and the three components that make one: loan term, Interest rate type, and loan type.
Are you a veteran? Make sure to take advantage of the VA’s Home Loan Guarantee Program.
To make sure that you have all the information you need available when you find the right lender, have an application packet ready. This typically includes W-2 information for the past two or more years, bank statements and other documentation. The Consumer Financial Protection Bureau offers a comprehensive list of documents you should have ready, helping your application process go as quickly as possible.
While there’s a lot to keep in mind when it comes to buying a home and how it impacts you financially, by taking the initial steps in examining your finances and budget you’ll be starting off your search for a new house in the best position possible.
To help you organize the steps you’ve taken in preparing financially, consider using this checklist to keep track of the entire financial preparation process.
