10 financial fitness tips for home buyers
Thanks to attractive interest rates, you may be considering purchasing a new home or refinancing your existing mortgage. But before you even sit down with a lender, get your financial situation in tip-top shape.
Try these proven tips that can help you put your best foot forward - and make the entire process easier.
- Save regularly. Lenders like to see that you’re conscientious about saving. They want to know you have enough money for closing costs, reserves and a cushion to cover future debt payments.
- Try to avoid big purchases. While you’re in the process of buying a home or refinancing, try not to take on another large debt, i.e. buying a car or taking a dream vacation. You’re about to make the biggest investment of your life - so hold off spending until after your closing is final.
- Carefully consider career moves. Lenders want to work with borrowers who have at least a two-year history in one job. If you quit, change jobs, or become self-employed, you’ll eliminate that history - even if you’re getting a promotion or salary increase.
- Use credit cards conservatively. Shopping for a mortgage is the wrong time to apply for new cards. Each time you do, it creates a hit on your credit report. Some people get so excited about furnishing their new home, they start buying furniture, appliances etc. and racking up new credit card debt - which ultimately limits how much “house” you can afford.
- Be diligent about making credit card payments by the due date. Remember, a May 15th deadline means May 15th. If you miss a payment and double up on June 15th, you’re still 30 days late.
- Know the facts about credit scores. The credit score you pull is not the one lenders will use. The FICO score you see is generic. Lenders use more specific industry credit scores that are customized for the level and type of debt a consumer is taking on.
- Check your credit reports for errors. They’re far more common than you might think. In fact, CNBC reports that more than one in 5 consumers have “a potentially material error” in their credit file - a mistake that makes them seem like a bigger risk than they actually are. It’s a good idea to check your credit reports frequently at annualcreditreport.com. Although you can do this for free, only 33 percent of Americans checked theirs last year.
- Understand the implications of co-signing a loan. You may be trying to help your boyfriend, girlfriend, daughter, son, best friend, fiancé (you fill in the blank). Even though they make the payments, you’ve created an additional debt exposure for yourself which appears on your credit report. Plus, if he/she defaults, you’re on the hook. It will ding your credit score and potentially hurt your chances for the mortgage approval you want.
- Be up front about your obligations. When you apply for a mortgage, don’t omit debts or liabilities. Remember, lenders will require a credit report and tax returns. You don’t want your lender to think you are trying to hide something AND you want to know what you really qualify for.
- Sign up for a first-time homebuyer education class. You’ll learn how credit scoring works, the importance of a home inspection, mortgage-shopping insights, costs you may incur and much more. Even if you’ve bought a home before, today’s marketplace may be much different. These classes are often free or offered at a minimal charge - and they get you up to speed fast. Find a local class at hud.gov.
There’s plenty of information out there on how you can buy a home with low down payments, little savings, nontraditional credit, low credit scores, and minimal documentation. To avoid the confusion, we recommend that you talk with a local lender who knows your territory: the neighborhoods where you’re looking to move, the state or municipal programs that can help with down payments, and the steps to get you over the threshold faster.
Knowledge is power, so get pumped up now for a smart home purchase—and a financially fit year!
The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.
All loans are subject to credit approval.