You have finally made the decision to purchase a home but now you need help and a little guidance on which steps to take to get your property financed.
If that's your case then you have came to the right place! In this article I am sharing ten important steps to take when preparing to finance a property.
10 important steps to take when preparing to finance a property
Set up a budget
Create a budget that reflects your actual habits over the last several months. Use your bank statements and receipts to determine your purchases and include everything into your expenses. From the coffee purchase to your utilities payments, ensure to include every detail as this approach will help you determine which expenses are a need and which ones are a want and can be cut down.
Considering lenders generally look for a debt ratio of no more than 36 percent of income including you mortgage - which typically ranges between 25 and 28 percent of your net household income - you will want to reduce your debt to about 8 to 10 percent.
This is a great time to pay a little more on your credit card balance, your car installments and student loans, if you have any.
Increase your income
Consider extra income such as taking a part time job or gig during the weekends.
If that isn't possible, do you have anything around the house that you haven't used much and can host a garage sale or sell it on Facebook Marketplace or Craigslist?
There are also other ways you can make money online for completing simple tasks. For example, Inbox Dollars pays you for activities such as watching videos, printing out coupons and even opening up emails. You can also use Rakuten to earn cash back on purchases you make online.
Save for a down payment
Yes, it is true that you can pay as little as no down payment on a property, however, you will want to be prepared and have it in the case you need it, especially if there is low inventory in your area.
With low inventory, buyers are prepared to offer more for a property they really want and if you have a down payment already saved you may be able to make an offer the seller can't refuse.
A higher down payment may also mean lower interest rates.
Keep your job
While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may have a negative impact in obtaining a loan or better rates.
Lenders like to see job stability which results in stable income and reduces the likelihood of default.
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Establish a good credit history
To finance a home a credit score of 620 and up is desirable. Download your credit history from all three bureaus right along with your credit score and look for any errors that needs to be corrected.
Also, ensure to stay current on all loans, bills and installments you have to keep bad marks off of your credit report.
Read more about credit scores and what factors impact it here and find out how to fix your credit in 11 easy steps.
Even if you have enough money to qualify for a mortgage and cover your down payment, you will also need to factor in closing costs, which can average between 2 and 7 percent of the home price, home inspection and any other unexpected expenses that may come along with purchasing a property.
You may also want to do renovation and additions or need some remodeling done to your new property after purchasing it and having the money saved to do that will keep you from having to use credit cards and finance companies.
Decide what kind of mortgage you can afford
Your financing professional can help determine the size of loan for which you’ll qualify based on the information you will give them. However, there are some terms in you need to become familiar with and make a decision before you approach a lender.
Find out what kind of mortgage is best for you: 30-year or 15-year? Fixed or adjustable rate? Are you veteran or considering moving to a rural area? There are also special loans for those types of cases so be sure to look into all possibilities.
A lender will need certain documentation to pre-approve you for a loan such as W-2s or 1099s, pay stub copies, account number for loans, and copies of two to four months of bank or credit union statements. Don’t forget property taxes, insurance, maintenance, utilities, and association fees, if applicable.
Seek down payment help
Check with your state and local government to find out whether you qualify for special mortgage or down payment assistance programs. If you have an IRA account, you can use the money you’ve saved to buy your first home without paying a penalty for early withdrawal.
Also, ask your lender to check for any current grants you may qualify for. Grants are money you don't have to pay back so you definitely don't want to miss out on this one.