Prep Work to Buy a Home this Spring
Tips to get your financial house in order right now
At a time when you're still making lists and setting the stage for the holidays, your thoughts are likely far away from spring. But if you're thinking about buying a home in a few months–a time when home sales typically start to ramp up–taking steps to get your financial house in order right now will help you avoid the stress of a last-minute rush.
Get Your Credit in Order
When determining whether or not to approve you for a mortgage loan–and how much you'll pay for it–one of the first things a lender will look at is your credit report, which tells potential mortgage lenders your habits around debt repayment. As a consumer, you are entitled to a free credit report once every 12 months from each of the three credit bureaus: Equifax, Experian, and TransUnion.
You can get them at annualcreditreport.com. When you do, review them for mistakes or inaccuracies. If you find any, file a dispute with the business that supplied the information, as well as the credit agency, which must investigate the complaint in question, usually within 30 to 45 days.
Obtain Your Credit Score and Maintain It
The three-digit FICO score, which ranges from 300 to 850, is the most common number used by mortgage lenders to rate your creditworthiness. While you can obtain your credit report for free, you may have to pay a small fee to get your credit score. A score of 740 or above will help you secure the best interest rates. If your score is lower, however, you may still qualify for a mortgage, but you'll generally pay a higher interest rate. Often, mortgage seekers with less-than-ideal credit attempt to boost their credit score in ways that may actually hurt them. Here are a couple of tips:
• Don't close lines of credit. While getting rid of old or unused credit cards may sound like a good thing, doing so may backfire. Your credit score takes into account the percentage of credit you've borrowed in relation to your total available credit, otherwise known as your utilization rate or balance-to-limit ratio. Closing an account causes the ratio of your existing balances to total available credit to go up, which could be an indicator of greater credit risk and ding your credit score.
• Don't open new lines of credit. Every new credit account you open can represent a risk, since credit bureaus don't immediately know if you will go on a spending spree, or use the credit carefully and pay your balance as agreed. This uncertainty may cause a dip in your credit score.
Boost Your Down Payment
The larger the down payment you come up with, the better the interest rate you'll be able to secure on a mortgage. That's because lenders will probably figure the more skin you have in the game, the less likely you are to default on your loan. A down payment of at least 20 percent of the selling price is ideal. In addition to snagging the best mortgage terms, it will also save you from paying private mortgage insurance (PMI), which protects the lender if you default on the loan.
Before you start home shopping, meet with a mortgage specialist who can help you to determine an accurate budget. This will help you know how much home you can afford. Next, arm yourself with a pre-approval letter. If a mortgage banker has already examined your credit report, verified your income, and taken other preliminary underwriting steps to come up with a maximum allowable loan amount, which a lender commits to in writing as long as you purchase a house during a set amount of time, home sellers are more likely to take both you and any offer you make seriously.
Keep Your Money in One Place
During the pre-approval and underwriting processes, you'll have to supply lenders with lots of documentation, including at least a couple of months of bank statements, which they'll scrutinize to verify income and expenses. If your records show an unusual deposit or withdrawal, you'll be asked to explain it, which could hold up the approval process.