Buying a home is a significant financial commitment that requires careful preparation and vigilance. Ensuring that you are financially prepared can help you avoid pitfalls and make the home buying process smoother and more successful.
Here are key considerations and things to watch out for regarding your financial situation, credit inquiries, pre-approval expiration, hidden fees, and more:
1. Review Your Financial Situation
Before you start house hunting, take a close look at your financial health. This involves understanding your income, expenses, savings, and debt. Here’s what you need to do:
Calculate Your Debt-to-Income Ratio (DTI): Lenders use your DTI ratio to assess your ability to manage monthly payments. Aim for a DTI ratio below 36%, but know you can have a higher DTI and still qualify for a loan.
Build Your Savings: Ensure you have enough savings for a down payment, closing costs, and an emergency fund. A larger down payment can lead to better loan terms.
Check Your Credit Score: Your credit score impacts the interest rates you’ll be offered. Aim for a score of 720 or higher to secure the best rates, though you can get a loan with a much lower credit score. Use Homa’s credit improvement resources if your score needs a boost.
Paying Off Debt: sometimes using a lump sum to pay off a debt isn't actually the best call. Depending on how much monthly debt gets calculated on your credit report, it may be better to use that money to pay off a different debt or put towards increasing your down payment. Consult with your mortgage lender before making any large debt payoffs.
2. Understand the Impact of Hard Credit Inquiries
When you apply for a mortgage, lenders will perform a hard credit inquiry to evaluate your creditworthiness. Here’s what you need to know:
Temporary Dip in Credit Score: Hard inquiries can cause a temporary drop in your credit score. Multiple inquiries for the same kind of debt (in this case, a mortgage) in a short period (typically 30-45 days) are often treated as a single inquiry, minimizing the impact. But if you get your credit pulled for a mortgage, new credit card, and to finance a car all at the same time, that can be detrimental to your credit score.
Timing Matters: Try to avoid applying for new credit (like credit cards or auto loans) before and during the mortgage application process to keep your score as high as possible. Also, if you have just finished paying off a debt, your credit report may not reflect that for up to 30 days, so pick the right time to pull your credit.
3. Keep an Eye on Pre-Approval Expiration
A mortgage pre-approval is usually valid for 60-90 days. Here’s why it’s important to be mindful of the expiration date:
Update as Needed: If your pre-approval expires before you find a home, you’ll need to reapply, which might involve another credit check and updated financial documentation.
Stay Informed: Maintain communication with your lender to understand the steps required to renew your pre-approval.
4. Be Aware of Hidden Fees
Hidden fees can add up quickly and impact your budget. Here are some common fees to watch out for:
Application Fees: Some lenders charge a fee to process your mortgage application.
Credit Report Fees: You may have to pay for your lender to pull your credit report.
Origination Fees: These cover the lender’s costs for processing the loan and can range from 0.5% to 1% of the loan amount. These are typically paid at closing.
Inspection and Appraisal Fees: These are essential for assessing the property's condition and value. These fees are paid after you are under contract but before you close.
Closing Costs: These can include attorney fees, title insurance, and recording fees, typically amounting to 2-5% of the loan amount. These are paid at closing.
5. Maintain Stable Employment and Income
Lenders prefer borrowers with stable employment and consistent income. Here’s what to consider:
Job Stability: Avoid changing jobs during the mortgage application process. Lenders look for at least two years of steady employment in the same field. If you do plan on changing jobs, you will need a detailed offer letter from your new employer.
Document Your Income: Gather pay stubs, tax returns, and bank statements to provide proof of income. Homa’s document checklist can help you keep everything organized.
Sourcing Funds: Keep in mind that any cash deposited into your account cannot be considered in the mortgage process unless it has been "seasoned" which usually takes six months or requires a detailed paper trail. That means if you've got money in your mattress, make sure you put it in the bank well in advance of the home buying process.
6. Avoid Large Purchases and New Debt
Large purchases and new debt can affect your credit score and DTI ratio. Here’s why it matters:
Keep Finances Steady: Avoid major purchases like cars or furniture until after your mortgage closes.
Limit Credit Card Usage: High balances can negatively impact your credit score and increase your DTI ratio. Do not open a new line of credit either.
7. Prepare for the Down Payment and Closing Costs
Having sufficient funds for your down payment and closing costs is crucial. Here’s how to prepare:
Save Diligently: Set aside a portion of your income specifically for these costs.
Understand Down Payment Requirements: Different loans have different requirements. Conventional loans typically require between 5% and 20%, but FHA loans may require as little as 3.5%.
Plan for Closing Costs: These include a variety of fees that need to be paid at closing.
Financial preparation is essential for a smooth and successful home-buying experience. By understanding your financial situation, being mindful of hard credit inquiries, keeping track of pre-approval expiration, and being aware of hidden fees, you can navigate the process with confidence. Homa offers comprehensive resources and tools to help you manage each of these aspects effectively, ensuring you are well prepared for every step of your home buying journey. With careful planning and the right support, you can achieve your dream of homeownership while maintaining financial stability.