8 Ways to Prepare Your Finances for Buying a Home

October 15, 2021

Buying a home is a big project and can be a frustrating process if you don’t know how to prepare for it ahead of time. If your finances aren’t in order, there could be delays and these delays may prevent you from being able to buy your dream home. 

With enough preparation ahead of time, you can be confident that everything will go smoothly. From your mortgage approval to making the final decision on your home, preparing your finances will set you up for success. 

Here’s how to do it:

#1. Set Aside Your Down Payment

Without a down payment, you won’t be able to make a bid on your future home. Unfortunately, your down payment will be quite a bit of money. If you don’t have enough saved up for it though, you could get rejected by lenders and banks.

Since 2008, requirements have become tighter to prevent buyers from defaulting. Where it might have been possible to buy a home without a down payment before, it’s all but impossible today. In fact, most lenders will require your down payment to be at least 4% of the buying price. Some may require more. 

Setting aside money for your down payment ensures that you have enough when the time comes.

#2. Look at Your Credit Score

Your credit score is going to play a huge role in how willing lenders are to accept your proposal. If you regularly max out your credit card or pay it off late, you’re going to encounter problems pretty quickly.

If you know your credit score isn’t great, try to improve it as early as possible. Say you want to start looking for a house in about six months. Don’t wait until then to improve your credit score. Start now so that when you begin looking for houses, you’ve already been working at it for several months.

Most banks and lenders will consider you if your credit score is at least 640. While some may approve those with lower scores, it will be incredibly difficult to find them. 

Make sure you educate yourself on things like VA mortgage guidelines and FHA loan requirements. Many times, specific types of mortgages will make sense for you. By knowing what’s required to qualify for these, you’ll be ready to apply for the best loan for your needs.

#3. Get Loan Pre-Approval

Let’s say you find the perfect house and decide to put down a deposit right then and there. Later, you go to get a loan and no one is willing to lend to you. Unfortunately, this means you can’t afford the house and your deposit will probably be lost.

Taking the time to get pre-approved for a loan will prevent this from happening. You’ll know before you ever put down a deposit that you’re going to be able to get the money you need. Loan pre-approval can also help you understand your budget and what types of houses you can and can’t afford.

Loan pre-approvals are incredibly beneficial and in some cases, the process is relatively quick. 

#4. Pay Off Existing Debt

Photo Credit: https://www.pexels.com/photo/person-signing-loan-agreement-for-purchase-of-apartment-5849563/

Applying for a loan when you already have existing debt doesn’t look good. Ideally, you don’t want to have any existing debt when you apply for a home loan but if this isn’t possible, try to pay off as much as possible. You want to show little to no debt as well as a good history of paying your debts. 

While it may be possible to avoid telling lenders about existing debt, they can pull up your history at any point during the approval process. Unfortunately, this can happen at the very last minute.

If you can’t pay off all your existing debts, be honest about it upfront.

#5. Keep a Steady Job

Having a steady job shows financial security. More importantly, having and keeping a steady job for at least two years can greatly increase your chances of approval. 

Lenders want to see that you have a reliable means of paying off your loan once it’s been approved. If you routinely change jobs or careers, you won’t be seen as a trustworthy borrower no matter how much you make annually.

If you’re thinking of switching companies or changing careers, you should wait until after you get approved and buy a house. Switching right before applying for a loan gives lenders the impression that you might not actually have the ability to pay them back. 

#6. Know Your Budget

There are a number of ways you can figure out an affordable budget. Taking whatever loan a lender will approve you for is not one of these ways, however.

Lenders don’t know your monthly expenses like you do. Even if you show them, there’s no way for them to accurately budget for your future home. Moreover, it’s not their job! Before you approach them, you should know how much you can afford.

Take time before meeting with a lender to determine your budget. If you know what you can afford, then you also know what you can’t afford. Not knowing can result in you taking out a loan that’s too big for you to repay. Fortunately, it’s an easy step to prevent a complicated problem.

#7. Have the Right Documents

You’re going to be asked to provide a lot of financial documents when you buy a house. If you don’t know where to find them, though, the process could be delayed and delays can result in you not being able to purchase a home.

Talk to potential lenders about what documentation they’ll request at both the pre-approval and approval appointments. It’s important that you take all the documents to both meetings as any mix-up could end up in your application being declined. 

#8. Choose an Affordable Interest Rate

Nobody wants a high interest rate, but sometimes your situation doesn’t allow you to choose a lower interest rate. Apply for a loan with the lowest interest rate possible. Different lenders will have different interest rates and conditions, so be sure to check with multiple instead of the first one or two you find.

Many factors influence your interest rate. Depending on the lender you look into, these will differ. Having a vague idea of what to expect, however, can send you in the right direction and keep you from falling prey to scams that seem too good to be true. 

Be Prepared, Be Successful

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Preparation is the key to success. By taking the time to ensure all your finances are in place before you put in your first offer, you’ll find that buying a home isn’t as stressful as some people say. You’re much less likely to experience delays and you won’t be met by any upsetting surprises. Prepare ahead of time and you’ll be ready to take on the challenge!

If you have questions related to your finances or buying a home, we can help! Please call One Community Real Estate®, Leigh Brown & Associates 704-507-5500 today!
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