Financially Preparing to Buy a Home
Most people can’t just rock up and buy a new home without some advance preparation. The purpose of this post is to provide a bit of a road map and some priorities for that preparation.
Lenders are going to take a hard look at your history and finances when considering how much to loan you. Here’s a list of what lenders will take a look at:
- Credit scores and credit history
- Down payment amount
- List of assets
- Income and employment history
- Tax returns
- Bank, credit and investment statements for the last three months
- Amount of your loan compared to the value of the home
- Total debt versus your income
- Your rental or mortgage payment history
To get the best interest rates, get your debt to income ratio below 43% and, if possible, your credit score above 738.
My favorite strategy to pay off debt is to focus on paying down the account with the lowest balance while continuing to pay at least the minimum amount on all others. Once the initial account is paid off, roll everything you were paying on that account to the next lowest balance and so forth until they are all paid off. If you have two accounts with similar balances, start with the account that has the highest interest rate. If you have an outstanding same as cash account that has an interest-adjusting balloon payment, make sure you pay that off before the balloon payment is due. Those adjustments can be brutal.
Credit scores don’t change overnight, but to give yourself the best chance at a high credit score, pay all of your bills on time; pay down existing debt and use less of your available credit; don’t open any new credit accounts (including same as cash deals); and maintain a mix of credit accounts. Ironically, closing your oldest credit accounts also negatively impacts your credit score, so keep those cards in a drawer but don’t use them unless the terms are favorable. FICO provides a fantastic loan savings calculator that shows the impact of your credit score on interest rate and it’s knock-on impact on monthly payments and total interest paid over the life of a loan.
Once you have your financial house in order and the required documentation together, identify a lender and get pre-approved for a loan. This is a fully documented process, is different than getting pre-qualified, and will put you in the best position to win the home you pursue. I work with a number of lenders that can provide a pre-approval letter. Let me know if you would like a referral.
Check out this post for information to determine how much home you can afford.
I’m happy to provide more ideas to help you present your best self to lenders when the time comes. Contact me if I can help you strategize for your loan application, or if I can help you land your dream home.
