6 Ways Homebuyers Prepare Financially
Many homebuyers are financially unprepared to purchase a home. According to a recent survey by the National Foundation for Credit Counseling, about half of respondents report being “least prepared” to buy a home. It's a clear sign that education is needed, especially for first-time home buyers.
Here's how to prepare finances well in advance of searching for a home.
1. Make a Financial Plan – Knowing where to start means conducting a complete review of how your household budget is managed. Comparing income and expenses, reviewing debt, and tracking savings are just a few of the ways to measure readiness for homeownership.
2. Review Your Credit Report and Score – A mortgage is typically the largest debt a person is likely to carry in their lifetime. Credit history plays a huge part in obtaining a loan, as well as getting a satisfactory interest rate from a lender. A credit report may be obtained without a score for free once every 12 months from each of the three bureaus by visiting AnnualCreditReport.com.
Review the credit report for discrepancies and dispute any differences. This should be done at least six months in advance of applying for a loan, allowing time for inaccuracies to be corrected.
Along with the free credit report, a score can be purchased for a small fee. This score is critical to mortgage approval and for a competitive interest rate. It's worth taking a look at the score before submitting an application for a loan. Lender guidelines vary, but a FICO score of 760 is typically the threshold for the most favorable interest rates.
3. Start Saving – A down payment is typically no less than 20 percent of the purchase price of a home, especially to avoid having to pat private mortgage insurance. Any down payment (with a mortgage) of less than 20% down will require private mortgage insurance (PMI). This alone can disqualify many borrowers. If 20% or more will be paid by the borrower at closing, it will also increase the chance of having more favorable mortgage terms.
4. Decide the Type of Loan – After you’ve selected a lender, decide whether to take on a fixed-rate or adjustable-rate loan. For those planning to remain in the home for a long time, a fixed-rate mortgage helps add stability by keeping the payment the same for the life of the loan. Those expecting to stay in the home no longer than five to seven years may be better off getting an adjustable rate loan, where typically, they could benefit from lower rates in the short term.
5. Get Pre-Approved for a Loan – Applying for a mortgage typically involves a cost and is done by supplying detailed financial documentation to the lender. The lender will use this information in conjunction with information obtained by pulling a credit report to determine the amount and terms available to the borrower. This is not a final approval for a loan but is a significant step toward that outcome.
6. Lock In the Rate – If you like the interest rate being offered when pre-approved, lock it in by getting the commitment in writing. It can take time to find a home, negotiate a price and secure funding. Locking a rate for a reasonable period helps make room to complete the process without risking a less favorable interest rate.
For more information, contact Treasure Coast Insider Blogger, Mona Leonard at 772-530-6131 or firstname.lastname@example.org