Ready to become a homeowner? When it comes to purchasing a home, there are a few things you can do before you start touring open houses and finding a local Realtor to guide your search. Applying for a mortgage puts a spotlight on your finances, so making sure they are in good shape is important for helping the process go smoothly once you do put an offer on a home. Here are six ways to get yourself (and your finances) in tip-top shape for buying a home.
#1 Build a solid credit history
One of the first things a lender looks at is credit history. To build a good credit history, you’ll need a history of paying off debts, like car loans or credit cards, plus paying bills like rent and utilities on time as well. This signals that you’re a responsible borrower.
#2 Check your credit
Your credit score can have a significant impact on your ability to buy a home. A low credit score can negatively affect how much money a lender is willing to loan you, as well as your interest rate. If you haven’t lately, request your credit score through one of the official agencies online. You are able to get one free one per year.
#3 Reduce credit card spending
Your credit score plays a big part in your mortgage application process. The better your score, the most likely you are to be approved at a lower interest rate. A big part of credit scores is determined by something called your utilization ratio. (All credit card balances ÷ total credit limit on all cards = utilization ratio). The lower your utilization ratio, the better. If your ratio is high, try to put extra money toward paying down balances. And definitely reduce spending on credit cards as well.
#4 Build up your savings account
Boosting your savings is very important, and we’re not talking about just for a down payment here. Mortgage lenders like to see that you’re not living paycheck to paycheck. Best case scenario is to have 3 to 5 months’ salary set aside, which will make you a much better loan candidate.
#5 Avoid large purchases
Avoid making any large purchases, such as buying a car or booking an expensive tropical vacation, just before you buy a house. When you apply for a mortgage, lenders will be looking closely at your financial history and can get nervous if they see big-ticket purchases that might affect your ability to you’re your monthly payments in the future.
#6 Avoid job hopping
Employment history and a steady income are two of the biggest factors lenders look at when evaluating you for a mortgage. If you plan on purchasing a new home sometime in the next year or two, a steady job with reliable income on the books looks best to lenders. If you’re offered something you just can’t pass up, however, you don’t have to put off your home search. Just be prepared to show extra documentation.