Few of us ever buy anything more expensive than a home, and when you are dealing with larger numbers even small mistakes can be magnified. If you are in the market for your first home, your first order of business is not to start looking at houses, but to take some time to ensure that your financial situation is stable and that you are ready for the outlay of funds unlike any before. Read on for some tips to get your financial house in order before you begin your home search.
Start with your credit score: Since the steps you take to improve your credit score will have a domino effect on your financial health in general, it pays to begin here. Some home buyers fail to take into account just how important a good credit score is to not only the ability to get a loan in the first place, but to score that prime low interest rate on the financing end. Interest rates matter more than you may think, since a tiny variation in the percentage rate could cause you to fail to qualify for a loan. The interest rate also affects the amount of monthly payments, which the lender uses to evaluate your credit worthiness. Here's a few steps to take:
1. Don't be even one day late paying your credit card bills and loans.
2. Keep a low balance on your debts. Using up a certain percentage of your available credit has a negative effect on your score.
3. Have a nice mixture of car loans, personal loans and credit card obligations on your report.
Pay down your debt: The lender will evaluate how much debt you have monthly vs. your housing costs, and you must stay under a certain ratio to qualify. Paying down debt means lower minimum payments, which means more money for housing.
Don't add to your debt burden in the time period prior to applying for a mortgage: Having too much credit available is just as bad as not having enough. The more availability you have, the greater your chances of getting in over your head. Additionally, applying for credit brings down your credit score, since each credit will perform a "hard inquiry" on your credit report to determine your approval. Seeking more credit can look like desperation to a mortgage lender.
Know what you can spend: You may be approved for a certain amount for your first mortgage, depending on your credit score, credit report, income and more. Just because the lender thinks you can handle a $250,000 mortgage, however, doesn't mean that you must spend up to that amount. Do your own evaluation of your budget and decide for yourself how much you are comfortable spending for housing.
Speak with your real estate agent to get more information about the financial aspects of home buying and what lenders look for in potential customers.