Buying a home for the first time often constitutes a long-awaited dream. After completing a little bit of financial prep work, feel free to enjoy every minute of the house-hunting journey. Here are the top four items to take care of before the fun begins.
1. Your credit score. Lenders typically like a higher score, above 700, to offer you better interest rates. (850 is a perfect score.) So it would serve you well to pull your report at all three of the major credit bureaus (Experian, Equifax, and TransUnion) to make sure yours is in good shape. If you don’t like what you see, you may be better of delaying a home purchase and taking the time to boost your score by showing a history of on-time bill payment and making progress on debt repayment. If you see an error or possible fraud, report it immediately.
2. Your debt-to-income ratio. Your lender will look at your outstanding debt versus monthly income and any assets you have such as savings, investments, or retirement accounts. Your current amount of debt, including any student loans, credit cards with balances, and car loans, all factor into this equation which shows how much of your income is used to pay the debt. Maxed out your credit cards? Pay them down before going house hunting.
3. Your down payment. Today’s average down payment is about 6 percent of the purchase price of the home, but the more you can put down, the less you’ll need to borrow from a lender, which will lower your monthly payments. A down payment of 20 percent means you’ll avoid mortgage insurance, which is an additional monthly cost. First-time buyers may qualify for down payment assistance programs. Ask your real estate agent for more information.
4. Your utility costs. Don’t forget to factor in your estimated monthly utilities costs to get a better picture of what your total monthly home-related expenses will be. Your lender certainly will. Using these four numbers, the lender will calculate how much you can afford each month as a house payment without ending up “house poor.” Financial experts vary, but the range is between 25 percent and 33 percent of your total income.