Posted on: 30 May 2017Share
Buying a home can be an exciting and stressful time with many ups and downs along the way as you search, make offers on homes, and apply for your home's financing. It is important to prepare your finances and get your credit in order before you go through the financing approval process, and here are two tips to help you get ready.
Check Your Credit
It is always a good idea to know what type of information is on your credit report, but even more so before applying for a mortgage. As a consumer, you can get a copy of your credit report for free each year from the three main credit bureaus. Your mortgage loan officer can use any of these three bureaus to review your credit. Call or visit the website for each of the credit bureaus to view your individual report. The three credit bureaus are Experian, Equifax, and TransUnion.
It can be helpful to look at each credit bureau's report to check for any errors on them. Erroneous information on your report, such as an extra vehicle loan or a collection or other derogatory reporting can prevent you from getting the lowest interest rate on your mortgage and can even prevent you from getting approval for a home loan.
Determine What You Can Afford
Before you begin searching for a home, make sure you know how much of a loan payment you can afford, therefore how much of a house you can buy. You don't want to find a home you want and find out later you cannot afford or qualify for the mortgage on the home.
Add up all your monthly debt payments on your credit cards, loans, and other financial obligations and divide this by your income before taxes are taken out, or your monthly gross income. Be sure to include your monthly mortgage payment in the total debt payments. This will give you a debt-to-income ratio.
Your mortgage lender will look to approve you for a mortgage in which your debt-to-income ratio is at 43 percent or less. Lenders have found that when a borrower's debt-to-income is higher than 43 percent, it can be common for them to run into problems making their debt payments, as they will need to still pay for food, utilities, and other living expenses. Check with a few different FHA lenders to get a good idea of where you stand.
Use these two tips to help you get your credit and finances in order for buying a home.