You’ve decided that you’re ready to buy your first home, but can you actually afford it?
Before you start shopping around for houses and applying for mortgage loans, there are several things you need to do and prepare first in order to ensure that you will be able to get approved for the home loan and purchase the house of your dreams. This guide will show you what to do before you buy a home.
Check Your Credit Score And Fix Any Errors
At some point in your adult life, you’ll probably want to purchase a home. That means, of course, that you’ll need a mortgage loan. When shopping for loans, most banks and lenders will look at your credit score as one of many factors in deciding whether or not to give you money. One way to increase your chances of getting approved is by establishing good credit early on in your adult life.
Before applying for a loan, it’s important to check up on any discrepancies—such as errors in your billing history—and fix them immediately so they don’t hold up an application later on down the line.
You can get your free annual credit report from each of these three major bureaus once per year: Equifax, Experian, and TransUnion. If there are any errors, file disputes with each bureau individually. You can also dispute errors with creditors directly if you notice mistakes on bills or statements. In addition to checking your reports for accuracy, be sure to pay off any outstanding debts before applying for a loan—even if it means living beyond your means temporarily. If there are late payments on record or other negative marks against you (such as bankruptcy), be prepared to explain why these occurred during an interview process with a lender’s underwriter.
Make Sure You Pay Down Your Debt
Before you even think about getting a mortgage loan, make sure you’re financially prepared. Pay off any outstanding debt. Most lenders will look at your debt to income ratio. Most lenders perfer your debt to income ratio is no more than 33%. That means if you have $1,000 in monthly debt payments, your gross monthly income should be at least $3,333. If it isn’t, consider paying down some of that debt before applying for a home loan.
Have 3-6 months Of Emergency Fund
Your emergency fund is different from your down payment but just as important. The reason why you need to develop an emergency fund before saving for your down payment is that you don’t want to risk losing all of your savings in case something goes wrong. Having an emergency fund will help you stay on track and not lose sight of what matters most, which is buying a home with money that can be used for other purposes if needed.
Once you have 3-6 months’ worth of expenses saved up, then it’s time to move on to part 2 of our series Adulting 101: A Homeownership Guide where we will talk about how to apply for loans and what documents are required in order to get approved!
Save For A Down Payment
Everyone says saving for a down payment is difficult. It can be, but having a tangible goal will keep you motivated. Think about saving $3,000 as a starting point. If you’re trying to save even more money, aim for around 20 percent down on your mortgage payment. That way, you won’t have to worry about PMI payments and interest rates will be lower on your loan. After you reach that initial savings target, set another one—and another one after that soon enough, you’ll be ready to apply for a mortgage loan!
Understand The Home Buying Process
Before you jump into home ownership, make sure you have a good understanding of what steps you’ll need to take in order to buy a house. There are 9 steps in the home buying process. Most real estate agents will walk you through these at your first meeting and can also help by providing you with paperwork that contains all of them (and many more).
The process is broken down into these parts: pre-approval, the search for a house; finding an agent; making an offer; inspections and appraisals; negotiating with sellers; paperwork and closing costs; moving day and beyond. As soon as you know where you want to live, contact an agent who can guide you through each step in detail so that there are no surprises later on. Remember, home buying isn’t something that happens overnight! It takes time, research, and careful planning before it happens—so start preparing now!
Get Pre-Approved For A Home Loan
If you’re serious about buying a home and don’t want to waste time looking at properties that won’t be in your price range, it’s essential to know how much house you can afford. Getting pre-approved for a mortgage loan is typically free and will give you a good idea of what your monthly payments would be—or help you realize that purchasing property might not be feasible for you. The process also gives lenders an opportunity to evaluate your financial health and credit history, letting them know whether or not they want to take on risk by lending to you.
Choose A Real Estate Agent
Choosing a real estate agent is as important as selecting a bank or an attorney. You will be working with your agent throughout the mortgage loan process and it’s important to select someone you trust. Make sure to ask how long they have been in business, how many homes they’ve sold, and if they can provide references from previous clients. The more information you have about them, the better equipped you are to make an informed decision.
It’s also important to find out whether they work on commission or charge by the hour; some agents charge a flat fee while others will only accept commissions. Regardless of their fees, make sure that both parties are clear on what is expected of each other before signing any agreements. Once you find an agent that meets your needs, don’t forget to check their status to make sure they are a licensed Realtor. These organizations collect complaints about businesses in order to protect consumers like yourself from scams and unfair practices.
Before you even apply for a mortgage loan, it’s important to make sure that you’re ready. If not, there are a few things you can do now to get yourself on track. These steps include figuring out how much home you can afford and getting pre-approved by a lender before applying for loans in earnest. This way, your loan application is as strong as possible from the start and requires minimal tinkering along the way.
If you are interested in learning more about homeownership stay tuned weekly
for more discussion on the home buying process.
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