Preparing Financially for the Mortgage Process

Purchasing a home is exciting and adventurous. But it can also be overwhelming – especially for first-time buyers. To avoid making mistakes, it’s important that you should expect, and can prepare in advance. Here’s a few key things to keep in mind as you begin your homebuying journey:

What your credit score does

Your credit score is one of the first things a lender will look at when you apply for a mortgage. To cut through all that confusion, here are five tips you can act on right now:

  1. Check your credit reports for free once a year through the three credit bureaus: Equifax, Experian and TransUnion. Why all three? Because the information in each of the three bureaus’ reports can differ. If one or all of the reports include mistakes, your credit score may be negatively affected, and you may need to address the errors before going house shopping.
  2. Be strategic with credit card use. The percentage of your credit limit that you use every month can affect your score. Make sure your balance doesn’t come too close to your limit.
  3. To maintain a healthy score, pay off the full balance before the due date each month. Anything after 30 days past the due date can negatively affect your score.
  4. Be consistent. Good credit behavior over the long term will keep your score high.
  5. Don’t take on more credit. If you apply for several different credit cards, you’re sending a message that you may have maxed out your other accounts

 Save enough for the down payment and other additional fees

You should plan to make a down payment of at least 3.5% – 5% when you’re budgeting for affordability. It’s important to consider that down payments are not the only costs associated with the purchase of a home. Your lender should be able to provide you with a breakdown of your costs that you will be paying upfront and on a monthly basis. Here are some basic tips to help you save for the costs associated with buying a home:

  • Keep a budget: Making a budget allows you to see your expenses and income, and more easily determine how much left over each month to save or pay off debts. When you have a savings goal, it can help prioritize your money by eliminating or cutting down on unnecessary expenses.
  • Automate: Once you’ve created a budget and determined how much you can comfortably save each month or paycheck, set up an automated deposit from each paycheck into a savings account for that amount to use for your new home. This allows you to see how much you’re saving each month, and can also keep you from accidentally spending this money on something other than your new home.
  • Increase your income: If you’re worried about cutting back on expenses, or just want to save for your down payment faster, consider finding ways to increase your income. Some ideas include working overtime, getting a second job or finding alternative ways to making money such as selling items online.
  • Save any unexpected money: When you get a large sum of money, such as a bonus or your tax refund, itis all too easy to take on the extra cash and purchase that one expensive thing you’ve had your eye on for months. Instead of going on a shopping spree, take that money and put it into your savings right away to help you achieve your dream of homeownership sooner.

Affordability now and in the future

Regardless of the level of your income you today, you’ll need to figure out what the future may hold before you sign on the dotted line. For example, if you’re planning to have kids sometime down the road, how will these happy additions impact your family income? What effect will job changes have on your current income level? And have you planned for monthly payments into your rainy-day savings account?

If you’re a two-income household, consider buying a home you can comfortably afford on just one salary. This strategy can help you continue to have extra cash for vacations and dinners out, or even upgrades to your home, but also helps safeguard your budget in case one of you experiences a sudden job change or hardship.

While homebuyers typically look to buy a home based on its affordable today, you’ll be ahead of the game by considering your future when determining your homebuying budget.

Ready to learn more? Start your own planning by reaching out first to one of our expert loan advisors who can partner with you throughout the process and help you determine if homeownership is the right path for you!