How to prepare to buy a house, financially, close to a year away.

Dated: July 20 2021

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If you are considering buying your first home and just in the planning stages, you are in the best position. Many people wait to plan months even weeks before they need to be in a home. You do not want to be weeks away from needing a home to start preparing. The best first thing to plan and look at - is your finances.

The sooner you start planning and looking at your finances the more time you have to get ahead of your credit, debt, and savings — which means you’ll have a bigger home buying budget and lower mortgage rate when you’re ready to buy.

Here are four steps to help you prepare if you’re up to a year from buying a house:

1. Check and/or fix your credit

Once you decide to start preparing to buy a home, the first thing you’ll need to do is check your credit. This involves getting your credit report from each of the three bureaus (Experian, TransUnion, and Equifax), and pulling your credit score.Your credit determines whether you’re eligible for a mortgage, and it influences your mortgage rate. The higher your score, the lower your rate.

Most mortgage programs require a minimum credit score between 580 and 620.

Ideally, you should check your credit at least six to 12 months before applying for a mortgage. This allows time to improve a low personal score, if necessary.

You should also check your report for accuracy and dispute any errors, especially negative errors that decrease your score. See my other blog posts for How to improve your credit score.

To get your credit file, contact each of the three bureaus separately, or order all three copies Each year you’re entitled to one free report from each of the bureaus.

2. Figure out your DTI

Your debt-to-income (DTI) ratio is the percent of your monthly gross income that goes toward debt repayment. Mortgage lenders use this percentage to gauge affordability.

Typically, lenders prefer a DTI ratio that’s no higher than 36% to 43%, depending on the mortgage program.

For example:

  • If you have a gross monthly income of $4,000
  • Your monthly debt payments (including a future mortgage payment) shouldn’t exceed $1,720
  • Your DTI is 43% ($1,720 / $4,000 = 0.43)

Some mortgage lenders allow a higher DTI, but only when a borrower has “compensating factors” such as a high credit score or a large cash reserve.

To improve your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans.

You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.

3. Save money

Today, the majority of mortgage programs require a down payment. This amount ranges from a minimum 3% to 5% for a conventional loan, and a minimum 3.5% for an FHA home loan. So if you pay $200,000 for a house, you’ll need at least $6,000 to $10,000 as a down payment.

A down payment isn’t required with a VA loan or a USDA loan.

Keep in mind, too, if you purchase with less than a 20% down payment, you’ll likely pay mortgage insurance. This insurance protects your lender in the event of default.

You’re also responsible for closing costs — which are roughly 2% to 5% of the loan amount (or $4,000-$10,000 on a $200K loan).

If you’re having trouble saving for a down payment, it’s possible to use gift funds or down payment assistance to help you qualify.

When applying for a mortgage loan, your lender will ask for copies of your bank statements to confirm you have enough in reserves for your down payment and closing costs.

If you do not have enough cash, some mortgage programs allow borrowers to use gift funds (Cash from relatives) to cover all or a percentage of their mortgage-related expenses.

4. Determine your budget

Before meeting with a mortgage lender, use anonline mortgage calculator to estimate affordability.

Once you know what you’re likely to afford, you can then estimate how much to save for your down payment and closing costs.

For example, if a calculator says you’re likely to afford a $250,000 home, aim to save a minimum $12,500 for your down payment, and perhaps another $5,000 to $7,500 for closing costs.

  • Estimated purchase price: $250,000
  • 5% down payment (typical for a conventional loan): $12,500
  • Estimated closing costs (about 3% of loan amount): $7,500
  • Minimum amount to save: $20,000

Mortgage calculators vary. Some estimate your monthly payment based on the home price, down payment amount, interest rate, loan term, and other monthly mortgage expenses like homeowner’s insurance and property taxes.

Of course, If you have more questions or need further advice, contact me or my wife Alise

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Daniel Torres

Hello - I am one of the Sales Agents for RJ Williams & Co LLc. I have been living in Fort Worth, Tx since 2009 also a retired Marine MSgt.....

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