Here are some tips for building your finances in preparation for a home purchase. From saving for a down payment and paying off debt to checking your credit score and determining how much home you can truly afford, this guide will offer insight into the financial aspect of a major home purchase.
Saving for a down payment is one of the main challenges of buying homes for sale in Roswell, GA. If you’re getting ready to buy a new home in today’s market, these tips can help you get your finances in order.
Build your credit score
If you’re applying for a mortgage, you’ll need to have a robust credit score, which lenders use to determine whether you’re eligible for a home loan. Your credit score also has an impact on your mortgage rates – generally speaking, the stronger your credit score, the more favorable the rates.
Experts advise checking your credit score about six months to a year before applying for a loan. This gives you sufficient time to repair your credit score if it’s lower than you’d like. This also gives you time to detect errors and dispute any inaccuracies in your credit score.
You can request a copy of your credit file from all three bureaus. You’re also entitled to a free report from each of bureau.
Determine your debt-to-income (DTI) ratio
The DTI ratio represents the percentage of monthly gross income that goes toward all debt repayments. Lenders use DTI ratio to determine how much home you can afford. Ideally, you should have enough income left to put towards mortgage payments once everything else has been paid off. Having less debt and demonstrating an ability to pay off debt on time will make you more appealing to lenders.
If you’re dealing with debt, pay them down as much as you can. Consolidate your debts and ask for assistance from a debt repayment program to speed up your progress. Work with a financial adviser to sort out your financial obligations and figure out how to start shrinking your debt.
Refrain from incurring more debt before applying for a loan if possible. Likewise, avoid making major purchases (i.e. a new car) in the months leading up to your loan application unless absolutely necessary.
Build your cash savings
Lenders typically require down payment ranging from 3% to 20% of the sales price. Then there are the closing costs, which usually amount to 2% to 5% of the total loan amount.
When applying for a loan, the lender will request copies of bank statements as proof that you have enough in cash savings for both fees.
Aside from saving for a sizeable down payment, you can also use gift funds from friends and family to cover part or all the fees as well as apply for down payment assistance programs (DPAs) if you’re eligible.
Set your budget
There are free online mortgage calculators that can give you an idea of how much home you can afford. Mortgage calculators will provide estimates of your monthly payments based on home price, interest rates, loan terms, down payment, and other related mortgage expenses like property taxes and homeowner’s insurance. Others will provide estimates based on your income and current debt.
Just keep in mind that these estimates are not final. A lender will give you a more accurate picture of affordability based on your financial circumstances.
This will help you determine what price range you can realistically aim for when looking at homes for sale. Many agents usually tell clients to determine how much home you can afford before attending open houses to streamline the search. There’s nothing more frustrating than finding the home of your dreams only to discover later on that it is outside your budget.
Evaluate your spending
When building your savings, you’ll need to scrutinize your spending to see where you can cut back and put more towards debt repayment. If you’re overspending on non-essentials like entertainment, travel, and apparel, you’ll have to decide if you can put more of the money towards savings.
Prioritize your expenses and find ways to trim the excess, if only for a certain period, in order to maximize your savings. There are many ways to reduce spending, such as cooking meals at home, buying second-hand, buying off-brand items, and more.
Lastly, if you are unable to cut back on spending, consider finding other sources of income to supplement your earnings and build your cash reserves. To make more money, you can get a second or third job. You can also speak with your managers about working longer hours and taking on extra projects. If your salary hasn’t increase in a while, negotiate a raise or transfer to a new job with higher pay.
If you’re getting ready to buy a new home, let a professional guide you through the process. Message us here. You can also call The Page Morgan Team for assistance at 770.579.5650 or email Distro(at)PageMorgan(dotted)com. With 25 years of real estate experience, we’re deeply embedded in the communities we serve.