Ok, so you have finally convinced your self to dive into buying a new home. Congratulations you are on your way to joining the 64.8 percent of Americans. Unless you are planning on buying your new home with Cash $$$ one of the first steps every new home buyer should do is evaluate their financial situation and their credit score.
Here is a list of tasks you should do before applying for a mortgage.
Figure out what kind of house you can afford
While this seems pretty obvious it’s easy to get lost in the excitement of buying a new house and forget to do some basic calculations and assessment of your current financial situation.
Use our Mortgage Calculator to figure out how much you can afford.
Some of the things that will affect the max you can afford are going to be:
- Your Monthly income
- Your Debt to Income ratio
- Your Credit Score
Check your credit
Your credit score plays a major role in getting your mortgage approved and at what interest rate. The first step is to get your most recent credit score along with your full credit report. Luckily for you with the sheer amount of FREE Credit Score Check websites that are out there, this should be a relatively easy task. Check out our own Top FREE Credit Check Websites article on some of those.
Dispute any credit report errors
On average 25% of credit reports contain some kind of errors. This is one of the reasons why you should check your credit report as soon as you start thinking about buying a home. In most instances, it can take up to 45 days to dispute and investigate the problem, so you want to give your self a head start.
Make sure your Credit Lines are all healthy
Depending on what type of Home Loan you are doing the majority of Home Loans require at least two or three credit lines that are active for the past year or two. If you do need to open new lines of credit make sure you only do it 6 months or more before applying for a Home Loan. Opening brand new lines of credit will affect your house interest rates in a negative way.
If you see any lines of credit on your report which are past due make sure you pay them off.
Keeping your Debt-to-Income ratio in check.
One of the major factors to getting approved for a loan besides your credit score is DTI ( Debt to Income ratio). This tells the lenders if you will be able to pay your mortgage on time.
In the nutshell, this measurement takes into account your outstanding debt as a percentage of your income before taxes. It is calculated by taking all your debt ( student loans, credit cards, auto loans… etc) plus your proposed monthly mortgage and then dividing it by your gross monthly income (before taxes)
As of now, current requirements are that you need to have a DTI ratio of 43% or less.
If you need to lower your DTI you will need to lower your current debt and that means paying off some of your credit lines.
Your mortgage broker can usually help you figure out a path to better DTI. If you are not working with a Mortgage Broker or Lender, our Realtor can recommend the quality lenders in your area.
Keep your bank accounts free of Major Transfers or transactions
You will need to provide several months of bank statements for your checking and savings accounts. Lenders will want to see that for the past 3 months your accounts don’t have any major money shuffling. Lenders want to see that money in your account is yours. If you do end up having money gifted to you, you might need paperwork that it shows it so.