The biggest mistake I see home buyers in Louisville KY and Southern IN make is starting the home buying process before getting their finances in order. I have seen many buyers fall in love with a $250,000 house only to find out that they cannot get preapproved for that much or they do not have enough money saved for a down payment. How to avoid this heartbreak? Get your finances in order BEFORE you start the home buying process. Follow these four simple steps and you will be good to go!
1. Improve Your Credit Score
Your credit score will be a HUGE factor when it comes to getting preapproved or applying for a home mortgage loan. One of the most effective things you can do is to work on improving your credit score before searching for your next home. Continue to make payments on time. Do not apply for any additional credit, loans, or any other debt. Do not make any large purchases. Do not engage in any activity that could result in a credit inquiry (except getting preapproved.) Check your credit report and if you see mistakes, call to get them fixed. Aim for a credit score of 700 or higher. Unsure what your credit score is? Sign up for a free credit score report at CreditKarma.com!
2. Pay Down Other Debts
Another important factor in applying for a home mortgage is your debt-to-income ratio. Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross (pre-tax) monthly income. For example, if my recurring monthly debts total $1,000, and my gross monthly income is $5,000, I have a debt-to-income ratio of 20% (1,000 / 5,000 = 0.2 or 20%). Different institutions, such as FHA, VA, or a conventional lender, could have different requirements for this number. Regardless, the lower your debt-to-income ratio, the better. You can make it lower by paying down your debts as much as possible.
3. Have a Healthy Savings Account
Lots of home buyers assume that they just need to save the 20% down payment to buy a house. Be careful! There are many more costs associated with buying a home. In addition to your down payment, you need to save enough money for closing costs and that could be as much as 5% to 8% of the purchase price of the home. Also, you want to have a savings account set aside for your first year of homeownership. You would be surprised at how many maintenance and upkeep costs come up as a homeowner. Make sure you have well over the normal 20% down payment saved and you will be good to go.
Before looking for homes, GET PREAPPROVED! This is an absolute must! You will not know how much home you qualify for until you get a preapproval letter stating this. It would be unfortunate to fall in love with a home just to find out that you cannot get approved for that much. So do this FIRST, and then you will have an idea of what you can afford. Getting preapproved is easy: all you have to do is spend 15 minutes on the phone or in person with a lender. Do your research and ask for referrals to find a great loan officer (we can help with that!) The loan officer will just need a few things from you to get your preapproval letter and then you can start the home search!
Do you already have your finances in order and you’re ready to start looking for your next home? Call me today at 502-551-1286 for a free consultation!