So you’re ready to pull the trigger on what will (probably) be the biggest purchase of your life: a home. Or do you just think you’re ready? There’s a lot more to picking the perfect house than deciding whether granite countertops and hardwood floors are must-haves. Fortunately, there are steps you can take in advance to increase the odds that you will be able to buy the home of your dreams.
1. Know your credit score
“A poor credit rating can be a huge barrier to buying a home,” says Margarita Mueses, bilingual housing counselor with American Financial Solutions. “In order to qualify for a home loan, many lenders seek a FICO credit score between 600 and 700 or higher.”
And just like a better credit score may help you qualify for the best credit cards, it also has an impact on mortgage rates.
“If you’ve got decent credit scores you may get approved, but might be asked to put down a larger down payment and pay a higher interest rate,” says John Ulzheimer, president of consumer education at CreditSesame.com.
So if you’re thinking of buying a home, the first step is to obtain your free credit score from WisePiggy. You may also want to pull your credit report from each of the three bureaus (Experian, TransUnion and Equifax). Once you know where you stand, you can decide how best to whip your credit into shape. Anthony Sprauve, senior consumer credit specialist at FICO, says that these steps may include:
- Ensuring that the information on your credit report is accurate
- Correcting any errors that do appear
- Paying off debt
- Making payments on time
There are also a few things to avoid. For example, Maxine Sweet, vice president of public education for Experian, says that “recent activity is viewed as risky” and may lower your credit score and make lenders nervous. As a result, you should not apply for new credit or close old accounts three months to a year before applying for a mortgage.
2. Start saving
There are many different types of mortgages, but regardless of what type you are seeking, it is helpful to save some cash before you buy. If you put less than 20 percent down on your new home, it is likely that you will have to obtain private mortgage insurance (PMI). This can add $100 or more to your monthly mortgage payment, depending on the amount of your loan.
The down payment and monthly mortgage aren’t the only costs to consider. Home inspections, pest inspections, appraisal fees, closing costs, property taxes and homeowner’s insurance … the list seems to go on forever. And that’s before you even take into account things like moving expenses and furniture for your new home. You must also be financially prepared for repairs and routine maintenance.
3. Assemble the paperwork
The FICO score is used in 90 percent of lending decisions in the U.S., says Sprauve. However, he acknowledges that it’s not the only factor in obtaining a mortgage, and that “employment history, income and savings are all important.”
When applying for a mortgage, be prepared to produce recent tax returns, pay stubs and proof of funds (account balances from your checking and/or savings accounts). You can refer to the U.S. Department of Housing and Urban Development for even more information on what buying a home entails.
Many times, lenders will ask you to fill out an abbreviated form of mortgage application paperwork called a prequalification or preapproval. Having a preapproval in place prior to beginning your search means you won’t unintentionally look at homes outside your price range. It also enables you to move quickly and make an offer when you do find your dream home.
The home search process is certainly stressful. However, with some advance preparation, you can reduce that stress, which will leave you free to enjoy your new home.