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5 Tips on How to Financially Prepare for a Home Loan

Blog posted On June 28, 2024

Are you ready to purchase your first home, but overwhelmed with where to begin? The way to set yourself up for success for the home buying process is to consider preparing your finances and getting into the best financial shape possible before applying for a home loan. Let’s walk through some helpful tips to help the process go as smoothly and stress-free as possible.

5 Tips on How to Prepare Financially Before Purchasing a Home

  1. Maintain a positive credit score
    • Lenders will evaluate your creditworthiness, and it’s important that you maintain a good credit score to secure as low of a rate as possible.
    • Ensuring that you’re making timely payments, keeping your credit card balances low and not applying to new credit is crucial to maintaining a desirable credit score.
  2. Budget for your down payment and closing costs
    • Budgeting can allow you to evaluate your spending habits and cut back on expensive habits. When you calculate how much you need to start saving, it can be helpful to prioritize some cost-saving strategies.
    • This would be a good time to start researching down payment assistance programs in your area and researching programs with lower down payment options like a VA or FHA Loan.
  3. Chip away at existing debt
    • Your debt-to-income (DTI) ratio can be just as significant as your credit score. A general rule of thumb is your ratio should not be more than 43% - and the lower your ratio is, the better.
    • This can include cancelling unnecessary subscriptions and setting a budget to start paying down debt. Not only will this help bring your DTI down, but it will also help have less monthly payments when taking on a mortgage.
  4. Get preapproved
    • This will provide you with a full financial picture, and help you determine what you can and can’t afford when shopping for a home. It will also keep you from falling in love with a home that may be out of budget.
    • A preapproval will also allow you to put your best foot forward and show the seller that you are a serious buyer.
  5. Make sure to have an emergency fund
  • With the joys of homeownership also comes the woes of unexpected housing expenses. Opening a separate bank account to start saving away portions of your paycheck is a step in the right direction. It is recommended that you have 3-6 months worth of expenses saved up when moving into your new home.
  • If you prepare an emergency fund before jumping into homeownership, this will set you up for home buying success and give you a peace of mind.

 

Diving into the home buying journey is a daunting process if you are not prepared before getting started. We hope these tips help you get on the right path towards your homeownership goals. If you are ready to get the preapproval process started, let us know!

 

Source: CNBC, Bankrate, Experian