With the spring home buying season fast approaching, anyone committed to buying a home in 2020 needs to start preparing. That can be a pretty daunting task, especially if you’ve never taken out a mortgage before. With all the rules, steps and considerations, buying your first home is like taking a crash course in the real estate industry.
But when you break it down, applying for a mortgage isn’t as complicated as it might first appear. Follow these four steps to prepare your finances and the rest will fall into line.
Evaluate your Credit
Having a good credit score is one of the best ways to qualify for a mortgage with favorable terms. Without solid credit, a bank may charge higher interest rates or deny your application outright.
Check your credit report or your credit score through a free service to see where you stand.
Make sure there are no errors on your report that could disqualify you for a mortgage.
See if there are any red flags from your past that may be disputable. Negative marks generally stay on your credit report between six and seven years, so call the credit bureau if you see any older than that.
Save for a Down Payment
If you haven’t started, now is the time to create a savings plan for your down payment. A down payment acts as proof of trustworthiness to the lender, so it’s a great way to establish yourself as a qualified borrower. You need to put down at least 5% for a mortgage, but a 20% down payment will save you from paying private default insurance.
How much you want to contribute depends on your budget and how soon you want to buy. If you want to purchase a home next year, you might not have time to save the full 20%.
Remember to also save money for closing costs, moving expenses and new furniture. Buying a home for the first time can come with a lot of surprise expenses, so it never hurts to save more than you’ll probably need.
Pay Down Debt
Lenders determine how big of a mortgage to offer based on your income and current debt load. The more you owe, the less you’ll qualify for.
Before buying a home, see if you can pay off high-interest debt or refinance to a lower monthly payment. Reducing your total debt burden will free up your finances and make it easier to qualify for the mortgage you want.
Look at your Budget
Borrowers often use their current rent payment to determine the size of the mortgage they want, but owning a home is far more expensive than renting. On top of the mortgage payment, you have to pay for repairs, maintenance and property taxes. When the water heater breaks, there’s no landlord to step in and handle the repairs.
Assess your budget and see how much wiggle room you have for the unexpected costs. If your monthly spending is already tight, consider getting a house with a monthly payment less than your rent. You can use the remainder to save for future repairs and other home costs.
About the Author
Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.