5 Things To Do Now If You Want To Buy A Home In The Next Year
If you’ve made the decision that you want to buy a home in the next year – congratulations! Becoming a homeowner is a big step but it will be a big step forward. Now you need to get ready to make this huge purchase.
The key to a smooth home buying experience is making sure that you’re as ready in advance. Do you need to start getting ready to buy a year in advance? Not always, but if you’re a first time buyer the more prepared you are the easier of a time you will have. Here’s what you should be working on over the next 12 months so that you can buy your dream home:
Check Your Credit Score
The first thing that you should do when you’re getting ready to buy a home is check your credit score. Your credit score will have a big impact on the type of home loan that you get and the interest rate that you’ll pay for that mortgage. You can check your credit score for free once a year here. And you may also be able to check it for free through your bank or credit union.
In most cases for a conventional mortgage, which is a mortgage that isn’t guaranteed like an FHA mortgage or a VA mortgage, lenders will expect you to have at least a 620 credit score. If your credit score is below a 620 then you should do what you can to raise it before applying for a home loan.
While that might seem like a lot of effort it will be worth it in the long run. If your credit score is low you will have to pay a higher interest rate on that loan. Over the length of a mortgage that extra interest can add up to a lot of money.
The best way to fix your credit is to pay your bills on time. Just making all of your payments on time can raise your credit score quite a bit. A good way to make sure that your bills all get paid on time is to set up Autopay for your monthly expenses. That way they will be paid from your bank account each month automatically and there’s no chance that you will forget to pay a bill on time.
Another way that you can raise your credit score is make sure that everything listed on your credit report is accurate. You have the right to challenge any old debts or reports that are incorrect but still show up on your credit report.
If there are inaccurate items on your credit report you should always challenge them. You can also get help from a credit repair professional if you need to address some unique issues with your credit report.
If your credit score is 650 or higher that’s great. But you should still check your credit report periodically to make sure that the score hasn’t changed.
Lower Your Debt To Income Ratio
Your debt-to-income ratio is one of the measures that lenders use to determine if you are financially able to make a mortgage payment each month and how much of a mortgage payment you can afford to make.
Simply put your debt-to-income ratio is the total amount of money that you make each month minus the total number of monthly debt payments that you make each month.
So to figure out what your debt to income ratio is you need to add up all the income that you earn in a month. Then add up all of the monthly debt payments that you make each moth for things like credit cards. Divide the amount of monthly debt that you have by the amount of gross income that you make and you’ll have your debt-to-income ratio.
Most lenders want you to have a debt-to-income ratio of around 35% or lower. If your debt-to-income ratio is 50% or higher it makes it much more difficult to get a mortgage. So if your debt to income ratio is high the best thing you can do during this planning year is pay off some of your debt. The kinds of monthly debt payments that count towards your debt-to-income ratio are:
- Monthly rent payments or your current mortgage cost
- Monthly car payments
- Monthly student loan payments
- Minimum monthly credit card payments
- Monthly time share payments
- Monthly personal loan payments
- Monthly child support payment
- Monthly alimony payment
Income that counts towards your debt-to-income ratio is any income that you pay taxes on. That could be a regular salary, an hourly wage, tips, commissions, or other sources of income. If you want to lower your debt-to-income ratio a great way to do that is to make double payments on your car, credit cards, or loan debt each month.
Avoid Major Purchases
Another thing that you should do when you’re planning on buying a home is to put off any major purchases. Taking on a bunch of new debt will change your debt-to-income ratio and it may also affect your credit score. If a lender checks your credit score when you’re trying to make a major purchase like a car or furniture that will temporarily lower your credit score and possibly jeopardize your ability to get a mortgage.
Even though it can seem like a year is a long time when it comes to fixing up your finances so that you can get the best deal on a home loan a year is really not a lot of time. And since your debt-to-income ratio is based partially on the amount of debt that you have adding a large amount of debt for something like a new car, a vacation, new furniture, a new computer, or new appliances could negatively impact your ability to get a mortgage.
If there’s an emergency and you need to finance car repairs, or a new necessary applicant like a furnace at the home you currently live in then you should pay off as much of that debt as you can before you start the pre-approval process to get a home loan.
Figure Out How Much House You Can Afford
It’s important to create a realistic budget when you’re buying a home. Having a clear understanding of how much home you can comfortably afford will give you and your agent an idea of the type of house you can reasonably expect to get in this market.
When you’re trying to figure out how much house you can afford, and how much money you can afford to spend a monthly mortgage payment, there are several factors that both you and lenders should be looking at:
Total Monthly Income
The total of all the income you receive in a month including things like investments or annuities. If you are buying the home with a partner or spouse their income can be considered as part of the total monthly income.
How much cash reserves do you have put aside to deal with emergencies? Having savings lowers the risk that your monthly income would need to go towards paying for emergency repairs, medical bills, or other unexpected costs.
Total Costs Of Ownership
The monthly mortgage payment isn’t the total cost of what you will need to pay for the home each month. You will also need to be setting aside money for property taxes, paying for home insurance, and paying HOA fees depending on the neighborhood you want to live in.
Total Monthly Expenses
This is the total of your monthly payments including debt, utilities, food, and other living expenses.
Having a good credit score makes you a better credit risk and lenders will feel more comfortable giving you a larger loan amount if you have a good credit score.
Down Payment Amount
The amount of money that you have to put down on the house will reduce your total overall debt and lower your monthly payment so you should always put down as much money as you can for the down payment.
Create A Must Have List For A New Home
Everyone has a dream home in mind when they start the process of buying a home. But unless you have an unlimited budget for a new home you will have to create a realistic list of the features that you need in a home and the features that you just would like to have in a home. When you’re shopping for a home having a solid list of must haves will make the difference between buying the right home and buying a home that looks great but doesn’t have what you need.
When you’re looking at homes it’s easy to get swept off your feet by fancy finishes and luxury touches. That’s when you need to rely on your must have list so that you are sure to buy a home that fits your lifestyle even if doesn’t have high-end finishings. Some of the most common things that home buyers put on their must have lists are:
- A certain neighborhood or location
- Number of bedrooms
- Outdoor space for kids of pets
- Number of bathrooms
- No carpet
- Finished basement
- Updated kitchens and bathrooms
- Garage or parking
It’s a good idea to start your must have list now because the list will inevitably change over time as you look at homes and see what features are really essential to your lifestyle.