The home-buying process can be intimidating, especially as you navigate the waters of your financial health, which is why it is so important to plan carefully and intentionally. The good news is that you don't have to work out all of this alone. Read on for our guide on the financial steps to take before buying a house.
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| Lee Joon Gi in Flower of Evil (2020). |
1. Check Your Credit Score
While you don’t need a perfect credit score of 800 to qualify for a conventional mortgage, it’s typically advised that you have a score of 650 or above. If your current score doesn’t quite measure up, you might need to pump the brakes and put your pursuit on pause. Fortunately, there are quite a few things you can do to improve your credit score to set yourself up for home buying success in the future.
2. Save for a Down Payment
Although most lenders don’t require a 20% down payment, they definitely prefer one. At the end of the day, the more you can put down, the more stable you’ll look in the eyes of potential lenders. And, the more money you're able to put down for that first down payment, the easier it'll be to get approved for a mortgage. Not only will your monthly payments be lower, but you'll end up spending less altogether over the duration of the home loan.
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| Lee Min Ki and Jung So Min in Because This is My First Life (2017). |
3. Determine Your Budget
It's easy to daydream about finding the ideal home with all the bedrooms and bathrooms your family needs, the neighborhood you love, and at a price you can afford, but fantasy and reality are two very different things. Based on where you want to buy a home, the price of your dream home could be out of your budget scope. But you won't know this until you determine your budget.
Consider starting with a tool like an affordability calculator. This calculator can help figure out how much house you can afford without putting a strain on your pockets. From there, you can begin to budget other factors like furniture, moving expenses, and other inevitable costs.
4. Optimize your DTIR
Your DTIR— or your debt-to-income ratio— is the ratio between the sum of your existing debt (including a prospective mortgage) to your current income. Generally speaking, mortgage lenders typically prefer to lend to borrowers that have a DTIR under 43%.
If you need a few easy ways to improve your DTIR, use the following tips:
● Increase the amount you’re paying toward monthly debt repayments
● Pay off loans ahead of schedule
● Refinance your debt with a new lender
5. Pick the Right Mortgage
It should come to no shock that you shouldn’t settle for the first mortgage you find. Instead, take your time and shop around to find the best quotes from local lenders. You’ll be pleasantly surprised by the difference a lower interest rate can make in the short term and long term.
Outside of conventional loans, there are several different types of specialized home loans that may be worth pursuing, as well. The most common mortgage loans available include:
● FHA Loans
● USDA Loans
● VA Loans
If you’re curious to learn about VA entitlement or what an FHA loan entails, be sure to complete this research before settling on a conventional loan.
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| Park Bo Gum in Record of Youth (2020). |
6. Create an emergency savings account
Owning a house is a big commitment in every sense of the word. The reality is that things happen, and for more costly events, you may need to tap into savings to pay for unexpected repairs, expenses, and so on. As you venture into the homebuying process it’s important to have emergency savings set aside.
Aside from saving for a down payment, make an effort to create a rainy day fund. Start by setting aside at least six to twelve months’ worth of expenses in a separate savings account.
Wrapping Up
Purchasing a house requires a thousand moving parts and complex to-dos. Using these steps, you will be able to walk into the next chapter of your life with confidence in yourself and in your finances!
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