Take These 5 Financial Steps Before Starting Your Home Search
Doing some financial housekeeping before purchasing a home can pay dividends in the long run, especially if you’re attempting to buy in a competitive market.
As a way to recognize National Financial Literacy month in April, we have put together 5 Financial Steps to consider before starting a home search.
Improve Your Credit Score
The higher your credit score, the lower your qualifying interest rates will be—meaning you’ll pay less on your mortgage over time. For a conventional mortgage, you’ll need a credit score of at least 620 to qualify and a mid-700’s score to access lower interest rates.1
Some of the best ways to raise your score include: paying bills on time, paying off debt, aiming for a credit utilization ratio of 30 percent or lower and maintaining your existing lines of credit.2 Discover your current credit score by requesting a free annual report from the three major credit reporting agencies at www.annualcreditreport.com.
Pay Down Debt
Aside from boosting your credit score, paying off debt before buying a house improves your debt-to-income (DTI) ratio—another factor that lenders use to determine your mortgage qualifications.
Your DTI ratio is how much debt you have relative to your income. Calculate your DTI ratio by dividing you’re your monthly minimum debt payments by your monthly gross income.
From a lender’s point of view, the less your DTI is, the less likely you are to default on your loan. Most conventional mortgage lenders look for a DTI of less than 43 percent.1
Avoid Major Financial Change
Major purchases or changes that affect your finances can be a red flag for lenders. Here are some changes you should consider delaying until after you’ve purchased your home:
- Opening or closing credit lines: Opening new lines of credit and closing existing ones can lower your credit score.
- Making major purchases: Charging large purchases on credit can lower your credit score and increase your DTI ratio, such as new furniture.
- Changing jobs: Lenders want to see proof of stable employment and income to ensure you can afford your mortgage.
Save for Homebuying Costs
The more you can save toward your down payment, the more house you’ll be able to afford. Your minimum down payment will depend on the type of loan you apply for, your credit score, your DTI ratio and other factors.
In addition to the down payment, don’t forget to save for other costs associated with the home buying process, such as closing costs and home repairs. Closing costs are known for blindsiding buyers, with the average totaling $6,837 including taxes.3
Compare Mortgage Preapprovals
In most cases, you need a preapproval letter to make a competitive offer on a home.
For preapproval, lenders evaluate various aspects of your finances, including your credit score, tax returns and recent pay stubs. They then produce a document stating how much they’re willing to loan you within a set period—usually between 30 to 90 days.
Getting preapprovals from multiple lenders allows you to rate-shop for the best loan possible. Though getting preapproved involves a hard credit pull, both the FICO® and VantageScore® credit scoring models allow you to apply for multiple mortgage preapprovals within a 45-day window where all mortgage-related credit pulls are treated as one inquiry—thus having minimal impact on your score.4
Home ownership is one important aspect of the "Investment House" and comprehensive financial plan that we walk our clients through. Our desire is to be a catalyst and help our clients make informed and educated financial decisions.
If you are interested in increasing your financial literacy and would like to discuss your financial planning or investment strategy needs, we welcome you to Contact Us to set up time to discuss further.
Sources
- Bieber, Christy. “5 Factors That Determine If You’ll Be Approved for a Mortgage.” Fidelity Spire. February 2, 2019. www.fidelity.com.
- “What Is a Credit Utilization Rate?” Experian. Accessed March 1, 2022. www.experian.com.
- Campbell, Bill. “ClosingCorp Reports Average Closing Cost Data for Purchase Mortgages in the First Half Of 2021.” Business Wire. October 12, 2021. www.businesswire.com.
- Ulzheimer, John. “Do Multiple Loan Inquiries Affect Your Credit Score?” Experian. November 24, 2020. www.experian.com
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.