Buying your first home is a big deal. It’s a huge investment and is probably the largest purchase you’ll ever make. While it’s very exciting, it’s easy to get distracted and make decisions quickly when you are being shown amazing backsplashes, walk-in closets and beautifully groomed yards. So, before you jump into the home buying process, make sure you are as prepared as possible to help everything go more smoothly.
The majority of us have to take out a mortgage when we are buying a home. Before you take the step of applying for your loan, it’s important to have your finances in order. There are many factors that lenders look at when approving applications. They consider things like your credit score, your annual income, your credit history and even your payment history.
Here are six financial considerations that can help prepare you for the home buying process.
1. Is your information correct on your credit report?
Before applying for a mortgage, go ahead and run a free credit report. There are three consumer reporting agencies that keep track of your credit, Experian, Transunion and Equifax. These agencies are required to provide you with a free credit report every year. By reviewing your credit report, you can check for things you can improve on before you start your mortgage process. Look for any incorrect information on your reports. When lenders see discrepancies between the credit reports, it can have a negative impact on your loan terms.
2. Do you apply for multiple credit cards?
Every time you apply for a loan or a credit card, you are authorizing the lender to check your credit. According to the Consumer Financial Protection Bureau (CFPB), when you apply for multiple credit cards, your credit score may be lowered. It can be tempting to open up new cards for discounts, points or low rates, just keep in mind that this behavior can have a negative impact on your credit score. However, myFICO.com says credit scores aren’t affected for credit inquires for things like student loans, mortgages and car loans. If you know you will be applying for a mortgage in the near future, refrain from opening up new credit accounts for a short period of time.
3. Do you make late payments or have had collection items?
When you pay your bills late, it can take a toll on your credit report. If you consistently miss a payment or pay after the due date, lenders can assume you will do the same with them. Lenders also look to see if you have any collection items and consider when the collection occurred, how many you have, how much was owed and how late they were. Moral of the story; pay your bills, all of them, and pay them on time. On the bright side, if you have a good track record of bill payments, your credit score can increase.
4. Are you pushing your credit card limit?
We all have unexpected financial emergencies. The A/C goes out, the car breaks down or Benji has to make a trip to the vet. When your bank account or emergency fund can’t cover the costs, we reach for the credit card. This is understandable, but if your habits include maxing out your credit cards repeatedly or hugging your credit line, it can look as if you cannot pay your debts and are living beyond your means which can affect your credit score. The CFPB advises that you keep your credit or debt at or below 30 percent of the credit limit. If you have a $10,000 limit, then make sure the balance is below $3,000 at all times.
5. Do you have additional income besides your salary?
If you are receiving income from other sources than your salary, you need to be able to explain where it’s coming from. This income can come from a hobby you’ve made into a small business, alimony, child support, allowances and assets such as stocks and bonds.
6. Do you have life insurance?
Purchasing a home brings a lot of financial responsibility. If you have a spouse or plan on having a co-signer on your loan, it’s important to consider a term life insurance policy. If your mortgage is spread over 30 years and your home is $250,000, you can get a policy that will match those terms. No one can plan for the unthinkable, but we can plan for the future. If you died, your spouse or co-signer would be obligated to take on the mortgage debt. A life insurance policy is a simple way to financially protect your loved ones. It’s easy to get a term life insurance quote to see how much a policy fit for your needs would cost.
Taking on a mortgage both exciting and a major undertaking. Having your financial affairs in order and understanding what your mortgage lender is looking for and why will bring you closer to owning the home of your dreams.