Buy a Home: Three Steps for Getting Your Finances in Order

Buy a Home: Three Steps for Getting Your Finances in Order


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buy a homeYou have decided to buy a home. However, don’t jump straight into open houses and looking at real estate agents just yet. First, you have to take some time to get your finances in order. This will be very helpful when you are applying for a mortgage. It will also give you some financial perspective and keep you from falling in love with a home that is way outside of your price range. Here are three steps to help you get started.

1. Check Your Credit Score Before You Buy a Home

When you buy a home, lenders use FICO scores, also known as credit scores, to evaluate how much of a risk lending to you is. You can score anywhere between 300 and 850. Higher numbers are the better scores. According to the Consumer Financial Protection Bureau, the best mortgage rates go to people with mid- to high-700s or above credit scores.

You can find out what your score is by going to annualcreditreport.com. This site offers a free annual report from the three major credit-reporting bureaus, Equifax, Experian, and TransUnion. Each bureau generates their own FICO scores based on the different data they collect.

You can improve your score, if it’s low, by:

  • Paying down high credit card debt
  • Cleaning up any financial errors

It takes time for your credit score to reflect these changes. In fact, it could take months for an inaccurate bill or years for tax liens or bankruptcies. It can, however, make a big difference in your mortgage rate when you buy a home if you clear up your credit.

2. Get Preapproved for a Mortgage

A preapproval letter is a lender’s written estimate of how much you might be able to borrow from them when you buy a home. This letter will help you determine your budget, and helps show that you can secure a home loan when you make an offer on a house. Being preapproved for a mortgage is not the same as being prequalified for a loan. Getting prequalified is a quick calculation of how much of a loan you might qualify for based on unverified information. The preapproval application for a mortgage usually requires submitting:

  • Pay stubs
  • Bank statements
  • Tax returns
  • Other financial documents

You should get one now. This way you will be ready to make an offer as soon as you find your perfect home.

3. Line Up Cash

The more cash you can pay up front when you buy a home, the better. Paying more out of pocket means you won’t need to borrow as much. Plus, having a bigger down payment will lower your monthly payments and less interest during your mortgage. Finally, in most cases, you won’t have to pay for mortgage insurance if you can put down 20% or more of the total home price. (Mortgage insurance is a premium that protects the lender in the event that you default on the loan.)

Don’t use all your money toward a hefty down payment, however. Lenders will want you to have some reserves in the bank for things like closing costs. According to Bankrate.com, who conducts a survey of closing costs nationwide, closing costs can easily add up to thousands of dollars. You will also need cash for moving, renovations and any other incidentals that come up.

For more information about how to get your finances in order to buy a home, give Affiliated Home Solutions a call. We work hard to help first-time home buyers get qualified and find the home of their dreams.

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