March 24th, 2018 6:07 AM by Jackie A. Graves
As springtime approaches and the home buying frenzy begins, many people have homeownership on their minds. And there’s no better time to start thinking about sprucing up your finances to improve your odds of landing your dream home. If you’re in the market for a new home, making sure your finances are in order before you find the home of your dreams will help you be able to pounce once it hits the market.
If you’re like the majority of Americans who plan on taking out a mortgage to finance your home, there are several steps that need to be taken before you even talk to a lender about getting a home loan. Because of the review process lenders go through when evaluating you as a potential borrower, you’ll be ahead of the game if you follow these spring cleaning tips for your finances.
Your credit score plays a vital role in whether or not you get approved for any type of loan, and it’s especially important when trying to take out a home loan. During this process, lenders will use your FICO score to determine whether or not you will be a good borrower. Even though there’s typically a minimum score required for a loan—around 620 for a conventional loan—lenders will take a closer look at other components in your credit history to verify you’ll be a safe borrower.
Changing jobs or having irregular paychecks could be seen as a red flag when lenders are reviewing your history. Because lenders want to be certain you have the money you claim you have, having a lapse in your paychecks can be troublesome. One of the most common reasons for having a gap in paychecks is usually due to a change in job, so if you’re able to stay at the same job it could help prevent further red flags.
Lenders generally don’t like to see a frenzy of purchases charged to your credit card when you’re trying to take out a loan. Buying things on credit can be an indicator that you don’t have money in your bank account and, in a broader perspective, could mean you don’t have enough money to make your monthly mortgage payments.
A major factor that can cause your credit score to fluctuate is your credit card debt. If possible, try to keep your credit card balances at 30 percent or less of your credit limit. Having a smaller, or obsolete month-over-month balance can help keep your credit score high. In addition to messy credit card statements, lenders also don’t like to see a bunch of new, recently opened accounts.
While a down payment of 20 percent or more is often considered ideal when buying a home— because buyers who put down less than 20 percent will typically have to pay a premium in the form of Private Mortgage Insurance (PMI)—it’s not a requirement to homeownership. If you are able to put 20 percent down, you’ll avoid paying that extra premium.
Nearly one-quarter of buyers (24 percent) put down 20 percent, with an additional 21 percent putting down more than 20 percent, according to the Zillow Group Consumer Housing Trends Report 2017. While some people end up putting more or less, knowing how much you can afford is important. You can easily calculate your mortgage and see what your payments will look like and get a sense for how much you should put down.
Figuring out how much you need to put down is the easy part. But figuring out how to fund that down payment is where the challenge arises for many people. But fortunately, people are finding creative ways to make it work.
In addition to more traditional routes, like saving up the old-fashioned way, some people are finding luck by selling stocks to fund their down payment. If you decide to go this route, make sure you give yourself enough time to sell. If you don’t have stocks or don’t want to sell any assets, you can always try sourcing some gift money from family and friends.
If you intend on embracing the more creative, nontraditional routes to fund your down payment, try driving for ride sharing apps or renting out an extra bedroom a few times a month.
Before you sit down with your lender, make sure you have all your mortgage application documents organized and ready. You’ll typically need copies of you pay stubs, W-2s, tax returns and additional documents provided by your lender. Your lender may also request extra documentation if you receive any money outside your regular job. They’ll also need a complete list of your debts and assets, and they might also ask for IRS Form 4506-T—which verifies the information on your W-2s.
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