Buying a Home? Be Financially Ready

Money

Buying a home requires time and planning. You have to be fully prepared before you make that purchase.

Owning a home could be one of the biggest decisions you would have to make in your life. Therefore, you must make accurate and precise decisions.

Calm down, take a deep breath.

We all know how our emotions can overwhelm us in moments like this. However, you cannot act on impulse or gut feeling. It places you at a great risk if you do not plan out and calculate it well.

A house is a huge investment. One of the most important preparations is to be financially ready.  We are not just talking about the large sums of money, but also lots of time and effort. Failure to prepare may lead you to loss, not just of money, but also of things of equal importance.

Let’s face it. Money gets the ball rolling when you are planning to purchase a property. This is why financial preparedness is a top priority.

Keep these steps to heart, and work your way to being the successful homeowner you envision yourself in the future.

Determine How Much House You Can Afford

Start by knowing how much money you can put towards the house. One way of doing this is by obtaining a mortgage loan pre-approval.

Through a pre-approval, a lender will review your documents. They do not only check if you are qualified for a loan, they also tell you how much money you are allowed to borrow and the interest that may apply to the loan.

The estimated money tells you how much house you can afford. It helps you set a budget and start looking for properties that fall well within it.

Before Buying a Home, Review Your Credit

Many people tend to skip this step. However, this should be taken as an integral step when buying a home.

How good (or bad) your credit determines how much financing you can get. In fact, it will determine if you ever get approved for a home loan or not.

For many conventional mortgages, a credit score of 720 makes you eligible for financing. If you have this score or higher, you may qualify for a low down payment.

One quick way to improve your credit standing it to look for any possible errors reflected on your record. If you spot on a mistake, make sure to get rid of it right away.

Making the necessary correction will make a lot of difference on your credit standing.

Not everybody is blessed with a stellar credit record. If despite making corrections, you are still left with poor credit, you can try other financing options.

For individuals whose credit scores are not good enough, there are still ways to obtain home purchase financing. Nonprime loans are designed for people with scores of 660 or below. Learning more about nonprime mortgages will help you know if this can be a viable financing option for you.

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Have A Good Grasp About Your Debts

Debt can be a huge roadblock.

Debts can make saving difficult. It can also hinder you from getting a favorable home loan. The very first step in addressing your debts is to have a good understanding of it.

If you are after a good financing deal, you have to work on bringing down your debt ratio as low as possible.

Go over your debts. Late payments do not only hurt your credit, it will also stack up interest. Money paid towards added interest will not bring the principal balance down. Strive to keep your payments current.

You also have to figure out which debts you can pay off completely before you apply for a loan. This will help improve your Debt-to-Income Ratio. Furthermore, it will also have a positive impact on your credit.

Most lenders will want a DTI ratio that does not exceed 36 percent. This means that your debts should not be for than 36 percent of your monthly income. If you meet this requirement, a lender can give you more incentive to approve the loan application.

To be safe, put your credit card somewhere out of your arm’s reach. When you spot on a sale, you have no other option but to walk away.

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Start Saving For A House

How much do you save?

Some are quick to answer that it depends on the price of the property. While there is some truth to that, home price does not entirely dictate how much money you need to save.

You have to think that when you obtain a new mortgage, down payment may be required.

While a few mortgages require as low as 3.5 percent, conventional loans may ask for as much as 20 percent down. Furthermore, if you take a non-prime loan, you may have to save up for an amount even larger than 20 percent.

There’s also the closing cost, which you would have to pay upfront.  You also need to be ready to take care of the home inspection and appraisal fees.

Next, there’s the earnest money.

This is the money you put towards the escrow account to show the seller that you are serious about buying the property. The earnest money is about 2 percent of the home price.

And then, you need money in your reserve accounts.

Many loan programs will require you to present proof that you have enough reserves before they fork over the loan. They see this as a cushion for you and for them. In case you lose your job unexpectedly, you still have enough funds to cover a few months’ worth of mortgage payments until you find new work.

Start building a reserve account. To give you an idea of how much money that involves, it should cover at least 3 months of your mortgage payments.

Do not Shuffle your Money Around

It helps a lot to keep your finances organized. It is not just about the clutter or the paperwork, it makes applying for a mortgage easier.

A lender will ask for your checking and savings account statements. If you have closed one account or have had a large transfer from one to another recently, you may need to do some explaining.

Your bank statements should reflect how much money comes in and home much goes out. It has to show a clear flow of finances. To save you the paperwork-hassle, leave your money and accounts as is for a good three months.

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