House Shopping? Make Sure Your Finances Are in Order

Consumer Financial Protection Bureau advises consumers don’t max out their mortgage limits

If you’re thinking about buying a home, it’s important to make sure your finances are organized before you explore your mortgage options.

Here are eight tips to get your finances in ship-shape before you settle on a mortgage loan and lender:

·        Prepare your finances—know that homeownership may bring surprise expenses like unexpected repairs.  Set aside 1% of your home’s value to cover these costs.  Also, it is important to demonstrate a stable income to a lender; a salary history of at least two years is helpful.  Don’t switch jobs.

·        Ensure your money is easy-to-access.  Are you expecting a financial gift from a friend or relative?  Will you be depositing any cash?  Have a gift letter handy when you apply for your mortgage, and if you have “cash stashes,” make the deposit at least 60 days before you apply.

·        Check your credit score and do what you can to raise it if need be.  Low credit balances, timely bill payments, and a good variety of credit sources demonstrate you are a good risk—and may net a better interest rate.

·        Know your down payment amount and understand your closing costs.  This is in addition to your down payment—don’t be caught by surprise.

·       Don’t max out the mortgage.  Lenders may approve you for a debt-to-income (DTI) ratio (your total debt, including the mortgage, divided by your gross income) up to 50%.  The Consumer Financial Protection Bureau suggests buyers limit their DTI ratio to 43% to cover income losses or emergency spending.

·        Understand different types of mortgages.  VA, FHA, conventional, and USDA loans come with a variety of down payment amounts, loan limits, and DTI ratios—among other variables.  Learn about the various loans you might qualify for to make your best choice.

·        Consider your total monthly housing spend.  Every month, your mortgage payment may consist of four parts: principal, interest, taxes, and insurance.  In addition, buyers not making a 20% down payment may also need to pay mortgage insurance.  Know where your dollars are going as you make your payments.  If you buy a condo or a residence that is part of another planned community, you may also be required to pay monthly association fees.

·        Shop for mortgage rates and get a preapproval letter. Compare rates with 3-4 different lenders, and don’t shop for a home until you have a preapproval letter—this tells the seller you are a serious buyer.

Buying a home is a big financial commitment.  Having your “financial house in order” will make navigating the purchase process an easier one and ensure your confidence when you’re ready to make an offer.

What can you do now to get your finances in ship-shape?

Post authored by Lora Bray.

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