Getting Your Finances Ready to Buy a New Home
Buying a new home takes planning, research, and patience. Not only are you considering the possibility of a new location, new schools, new employment, etc. you also need to consider the state of your finances. Is there room for improvement in this area? Have you saved up enough for a down payment? Now is a great time to figure out exactly what you need to improve and adjust so you can buy the home of your dreams.
What Do Lenders Consider When You Apply for a Home Loan?
During the process of obtaining and applying for a home loan, the lender will use various methods to determine if you are able to pay them back. They will want to see if you have enough cash to cover the down payment, if you have a steady income, and if you’re also able to cover the eventual costs of taxes, closing costs, and other fees. Your investments, bank activity, and other elements of your financial life will all be scrutinized.
They look at your banking and credit to see if you have a history of paying off debts, and they look at how much debt you have. This in-depth survey of your overall financial situation is so that they can best decide if you are a good candidate for a home loan.
How can I keep good credit or improve my credit?
Use Less Available Credit
Many credit experts say you should keep your credit utilization ratio — the percentage of how much credit is available to you and how much debt you have taken on — below 30% to maintain a good or excellent credit score. This is a good rule of thumb but the lower your credit utilization ratio, the higher the chance the lender will look at your application favorably. The less credit you use from what is available to you is a good indication that you are living within your means.
Obtaining the highest possible credit score is important so lenders will offer you a good percentage rate on the loan. The higher the credit score, the lower the rate offered which can amount to tens of thousands of dollars saved over the life of the loan.
Pay Bills On Time
Credit scores are an accurate reflection of how well you are at maintaining consistency with paying your bills on time. If you miss even one payment, it can take a toll on your credit rating. Whether you want to get back on track or stay on track to buy a newly built home, pay your bills when they are due.
Avoid Opening New Lines of Credit
When you apply for a credit card or loan, the lender makes a hard credit inquiry into your finances. This can have an (although temporary) negative effect on your credit scores. In addition, having a mix of different types of credit accounts is looked upon more favorably by lenders, so try and have that established before the loan process.
Save For Your Down Payment
Being able to put down 20% or more for the down payment of your home is truly ideal – you will more likely be able to secure a loan and avoid having to pay PMI (private mortgage insurance). 20% down gives you a goal to work with while you are in the process of moving to Montana. The bigger the down payment, the less money you will have to borrow and the lower your mortgage will be. Plus, you’ll likely get a lower interest rate and will pay less for your home overall.
Manage Your DTI
Your debt-to-income ratio is very important to lenders, and if your DTI is over 43% you run the risk of not getting approved. The best way to lower your DTI is by paying down your existing debt. It is recommended to start with the smallest debt first and work your way up. This approach will give you a sense of completion and the ability to move forward and conquer other debts.
Another way to overcome debt is by tackling the highest interest loans, though those might take longer to pay off than the smaller debts. Whichever method works best for you will help you lower your DTI and put you in a better position for home ownership.
Set a Budget You Can Afford
If you want to know ahead of time how much you can afford, consider going through the process of getting pre-approved for a mortgage. Remember, this number reflects what you can afford but it doesn’t necessarily take into account your comfort level. You will also have closing costs to pay, moving costs, home furnishings, etc.
If you are considering moving to Montana, work on paying down your high-interest debts, lowering your DTI, and staying within your budget so you and your family can enjoy a newly built home and all the amenities the home – and Montana – have to offer.