Purchasing a new home is a venture that many people look forward to. But did you know there’s a wrong way to do it? If you’re ready to move from “browsing” to “buying,” then don’t skip these steps if you want to prevent some costly mistakes.
To avoid these errors, read on for six things you need to do before you buy a new home to ensure your home-buying experience runs as smoothly as possible!
Get A Credit Report
Having an updated credit report is essential for almost any big-ticket item you’d like to buy. This is because a credit report is typically a quality indicator for lenders as to the type of borrower you will be.
Get a copy of your report from the three major credit reporting companies (Equifax, Experian, and TransUnion) at www.annualcreditreport.com and make sure the information is accurate. Evaluate your issues. Do you have a short credit history? You may need time to build it up. Is your file “thin” (fewer than four credit accounts)? Consider taking steps to show you can responsibly handle credit by opening new accounts. Are you using too much of your available credit? Pay down what you can on existing accounts to keep your credit utilization at 30 percent or less. Have you missed payments? Use calendar reminders or set up automatic payments of minimum amounts to help you stay on time. Getting in the habit of pulling your credit report once every 12 months is a good credit management habit.
While the entire report is required for items like cars, homes, and other purchases that demand monthly payments, the most important component is your credit score. The most influential factors affecting your credit score include your total credit usage, your debt-to-income ratio, your payment history, the age of your credit history, and any new accounts you open.
It’s important to keep away from making any additional big purchases while you’re attempting to buy a home, as this will increase your debt-to-income ratio and, in turn, take a hit on your credit score. Instead, work on paying down any debt you do have and fight the urge to make any impulse buys until your report is completed and in good standing.
Visit https://vantagescore.com/consumers/credit-score-quiz to test your credit score knowledge and learn ways to improve your credit score. No matter your starting point, taking the time to understand how credit works can help you make more informed decisions and improve your own credit outlook.
Assess How Much You Can Actually Afford
Staying within your means is key to a successful home-buying experience. While there’s always an opportunity to refinance your home loan, doing it right the first time can save you from a lot of unnecessary headaches.
Don’t let your vision get bigger than your budget at the time of signing. Lay out all your finances and assess where cutbacks can be made to put you in a better financial position at the time of purchase. If you see opportunities to put some money away or to budget more effectively in other areas, take the time and energy to do so. It may be the best decision you make when it comes time to house hunt!
Save For a Down Payment
For many, saving money is no easy task. Consider signing up for a money management app using your smartphone. There are plenty of apps to choose from with various methods for saving up. Try an app that stockpiles the extra change from each daily purchase you make or use a system that automatically deposits a set amount from each paycheck you receive to see your rainy-day fund grow quicker than you thought was possible.
Collect Your Financial Statements
Avoid scurrying to find everything (and the anxiety that comes with it) by knowing exactly what you need beforehand. While your credit report is a staple in the list of documents you need to buy a home, there are a bunch of others you should also dust off. The two other records you will need to recover are proof of income and your earnest money deposit.
When you gather evidence for proof of income, be sure to include pay stubs, W-2 forms for both you and your spouse, bank statements, tax returns, an asset statement, and your license for easy identification. You can make photocopies of each to hand over to potential lenders and keep the originals for safekeeping.
Your earnest money deposit is next on the list. Earnest money is a good-faith deposit to the seller to secure a contract when showing interest in buying the home. While this money is a piece of a down payment, it is not used in place of it. This is key, as the amount could be lost if the contract becomes null and void. And remember, when making an earnest money deposit, never give the amount directly to the seller. Instead, go through a valid third party, such as a real estate brokerage, legal firm, or title company.
Secure Mortgage Pre-Approval
Working with a trusted mortgage lender is an essential step in acquiring a new home. There are plenty of reputable companies that can provide either face-to-face or online services. Getting pre-approved for a mortgage requires several key elements.
The first is to collect and present all the documents from the previous tip so that you can provide ample confirmation of your borrowing ability to the lender. By providing in-depth information on your credit, debt, income, and assets, a lender is better able to assess how much you will qualify for and the terms and conditions that will best fit your situation. Don’t forget, the amount presented to you at this time is an official offer from the lender that you can accept, modify, or reject.
Understand Mortgage Refinancing
As consumers move through different stages of homeownership, many eventually consider refinancing their mortgage. If credit scores have improved since the initial mortgage was secured, refinancing may be a useful strategy to lower monthly payments, reduce interest costs, or modify loan terms.
When you refinance a mortgage, you are applying for a new loan that replaces your current one. The lender will conduct a comprehensive risk assessment, which includes pulling one or more of your credit reports and credit scores, verifying your income, and, likely, ordering an abbreviated property appraisal to determine the value of your home.
If your mortgage refinance loan is approved, the new loan funds will be used to pay off your existing mortgage loan. This will take place during the closing of your new loan, which may occur at a lawyer’s office. Shortly after, the pre-existing mortgage balance will be updated to zero on your credit reports, and your old loan will eventually stop being updated by your lender or servicer. As you make on-time payments, the balance will decrease month after month, and your account will build a positive payment history.
Many consumers worry that refinancing will significantly harm their credit scores. But if you can save hundreds of dollars each month by refinancing and plan to stay in your home long term, you should consider refinancing. Think about what you can do with hundreds of extra dollars in your pocket each month. You can pay down other debt, contribute to your retirement nest egg, or establish an emergency fund.
To the extent your credit scores are impacted by refinancing, you shouldn’t be overly concerned. If you already have great credit scores, any changes would be less material. For example, if you had a credit score near 800 when you refinanced, you’d likely still have elite scores after the refinance. Plus, any impact, albeit minimal, would be temporary, and your scores would likely recover in short order. But the lower monthly payment will persist for the next 15 to 30 years, depending on the length of your new loan.
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