Getting Your Finances in Order
Benjamin Franklin wasn’t speaking specifically about home buying when he said, “By failing to prepare, you are preparing to fail.” But he could have been.
Since buying a home is one of the largest purchases you’ll ever make, you need to enter the process with your finances in order. Or, what Barry Zigas, director of housing policy for the Consumer Federation of America, calls a “preflight check.”
Before you get your heart set on the home with the big yard or the condo in the city, you should take steps to demonstrate you have a stable financial situation and are a serious buyer. By doing a little financial housekeeping, it will help ensure your dreams of homeownership become reality.
- Assess. First, assess how much money you’re making and spending. Document all your monthly and yearly expenses as they relate to your home, vehicles, taxes, insurance, groceries, phone, Internet and schooling. How much liquid savings do you have — enough for a down payment? Do you have an emergency fund for unanticipated expenses or times due to loss of income? If you don’t have substantial savings, build a plan for getting there. To make it easier to save, have money automatically deposited from your paycheck to a high-yield savings account.
- Get smart about credit. Your credit report contains information from lenders, utility companies and landlords about your credit history. This data is compiled by three major credit-reporting agencies: Equifax, Experian and TransUnion. Each of these bureaus applies a proprietary mathematical formula to the information in your credit file to generate your credit score, which can range from 300 to 850, with under 400 being low and 700 or higher putting you in the healthy range. If your credit score is below 620, you may have a tough time finding a traditional lender who wants to lend you money.
- See what lenders see. Before you start the home buying process, it’s important to see what your credit profile looks like to potential lenders. You can receive one free copy of your credit report each year at Annualcreditreport.com from the three major credit reporting agencies: Equifax, Experian and TransUnion. For a small fee, you also can also learn your credit score.
- Clean up. Mistakes happen; correct any errors on your credit report by contacting the reporting agency. Next, you’ll want to reduce or pay off debts. Most lenders want your total debt to be no more than 36 percent of your income. Start by paying down higher interest debt first. You may want to continue using at least one credit card and pay it off in full each month. Make sure you make all payments on time and avoid taking out any new loans. Improving your credit score may help you get a better interest rate and ultimately lower your mortgage payments.
- Get pre-qualified. Once you have a clear idea of your financial situation, it’s time to get pre-qualified for a mortgage. You supply the lender with information about your debt, income and assets, and they give you an idea the size of mortgage you can afford. Because it’s based only on the information you provide, your pre-qualified amount is not a sure thing; it’s just the amount for which you might expect to be approved.
- Get pre-approved. If you’re ready to move further down the road toward home ownership, your next step will be to get pre-approved. Long before you actually find your dream home, you must complete a mortgage application and supply your lender with information they need to conduct a check on your financial history and credit rating. At the conclusion of this review, the lender can tell you the specific mortgage amount for which you are approved. With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to search for homes at or below that threshold.
Getting your finances in order can take some time, but it’s a process that will help ensure your home buying experience is a happy one.