Diary of a First Time Homebuyer: Ch. 1 Getting Your Finances in Order
With a professional background in real estate, I felt fully prepared to purchase a home. I’d heard about how important a high credit score is, knew the ins and outs of prequalification, debt-to-income ratio, etc. and was prepared for all of the pitfalls first-time buyers often succumb to. When my boyfriend and I decided to purchase a home in May, I felt that we were truly ready for a smooth process. Much to our dismay, the home-purchasing process was still a taxing, stressful and emotional journey!
Before we even began looking at listings, we first got pre-approved for a loan. This is extremely important as many people have a price in mind and then find out they can’t afford that range. Likewise, many home shoppers start by looking for homes they like and by the time they’ve gotten qualified and found a real estate agent, their dream home is gone.
Once we were pre-qualified, I contacted a real estate agent to represent us. I’d done a lot of research on agents who have worked with first time buyers in our area. I looked for local expertise as well as positive client referrals. When I reached out to our agent, I sent her our pre-qualification letter, the exact home dimensions we were looking for, our dream neighborhoods and timeline. Before we get into the actual home search process though, here are some key things to start doing one year before you plan to purchase a home:
1. Work on your credit score – Do a check-up on your credit and find out where you are. Make sure there are no errors on your report, and if it’s low, then come up with an action plan to improve the number before you search for a home. If you’re buying with another person, the lowest credit score is the one that will be most important, so remember to have all parties do their homework. A good credit score is necessary to get a low mortgage rate and influences an underwriter’s willingness to lend to you.
2. Pay down debt – If you have large amounts of debt that you carry each month, it’s time to work on paying it down. Start by tackling credit card balances; likewise, if you have one or more car loans, see if paying one off is an option. Ultimately, you want your debt-to-income ratio to be below 50% and things like car payments, student loans and credit card debt all factor into the figure. The smartest strategy for deciding which debt to pay off first is to begin with the highest interest rate.
3. Saving for the down payment and more – When most think of the upfront costs associated with buying a home, they think primarily of the down payment. While this will be the largest chunk of money, you also need a substantial amount for closing costs. Closing costs can be up to 6% and can be even more if you put less than 20% down. Showing that you saved money consistently over an extended period time also shows lenders that you’re fiscally responsible and a good candidate for a loan. If you’re using gift money, talk with a lender early to find out the specifics of what you will need to do.
4. Limit financing large purchases – As a rule of thumb, try not to finance large items right before purchasing a home such as a car, expensive furniture, etc. This will factor into your debt-to-income ratio and could also affect your credit score.
We crossed off most of these items before shopping for a home, but my boyfriend did buy a new car out of necessity a month before we got financed. While the car didn’t exclude us from being able to purchase a home, it did affect our debt-to-income ratio and left us to do a lot of explaining about credit inquiries during the underwriting process.
Check back for my next post about home shopping and making offers in our current market!