Buying a house for the first time is right up there with major milestones like getting married and having a baby. It’s exciting, maddening, and the biggest investment most people will make.
It’s a big deal for you—so get ready for the great inquisition. You don’t even want to approach a lender if you don’t have your finances in shape—but don’t worry, we can help.
Here’s what you need to do:
1. Check your credit worthiness
You probably already know that your credit score had better be stellar, at least 700 or higher. If you’re not in that ballpark you can’t expect to get the lowest interest rate.
Get your credit report from annualcreditreport.com. Check for inaccuracies and fix anything that’s incorrect that may be dragging down your score.
If your score needs boosting, it’s worth it to delay mortgage shopping. In the meantime, pay on time and be sure you have a favorable debt-to-income ratio.
2. Learn your debt-to-income ratio
So, you may be wondering what the heck that is. Think of it like this—how much debt you have, compared to how much money you earn. To figure out your debt-to-income ratio, add all your monthly debt payments and divide the sum by your monthly gross (i.e. before tax) income.
Your debt-to-income ratio is of much importance. Why? Lenders want to feel some certainty that you can handle the extra money you’ll have to shell out monthly in a mortgage. They won’t just look at your other existing loans and credit, but all of your expenses.
If your debt is too big for your paycheck, this could prove troublesome. Lenders may think you vulnerable and assume that the probability of you defaulting too close for their comfort.
Generally, a debt-to-income ratio of 35% or lower looks good. To improve your ratio, you’ll need to increase your income or reduce your debt.
3. Figure out what you can afford
Meet with your financial advisor to help determine how much house you can afford. Consider your income, assets and liabilities. Remember to take into account potential repairs, homeowner’s insurance, and routine maintenance.
Map out a strategy for reducing existing debt. For example, what about your student loans? By refinancing, not only might you lower your interest rate, but also your monthly payment, freeing up cash for paying off other debts or building savings.
A good way to test the waters is to get preapproved for a mortgage. The lender will give you a sense of how much you can realistically borrow.
4. Shore up savings
Not only will lenders be impressed if they see you have an emergency fund of at least three to six months of expenses, including enough to pay that new mortgage, it will give you peace of mind.
Ready to get started?
One way to start getting your finances in shape quickly is to look in to refinancing your student loans. With this Refi Ready tool, it only takes 10 seconds to see how much you could save.