So, you’ve been poking around at houses. You’ve found the neighborhood of your dreams and you’re ready to say “sayonara” to your grouchy landlord.
Yet, moving out of your apartment and buying a house isn’t as easy as it sounds. While you may be mentally ready to make the leap, you also need to be financially prepared. This means you’ll need enough savings for a down payment and a strong credit score – especially as we are in seller’s market.
In a seller’s market, homes sell at an accelerated rate, at higher prices – often after bidding wars. According to Realtor,com, homes are selling 10 percent faster and for nine percent more money than at this time last year. If you’re a first-time house hunter and you aren’t prepared, you may end up losing out on house after house.
Sounds stressful, right? Luckily, we’re here to help with 5 ways to prepare for house hunting. Take a look:
1. Get Pre-Qualified
Pre-qualification for a mortgage is a quick and free process that can be done online or in-person with a lender. In the pre-qualification process, you start by answering a few questions about your finances. Based on the information you provide, the lender will tell you if you’ll be approved, how much house you can afford, and what your interest rates will be. It is ideal to get a quote from two or three different lenders. This way you can choose the lender with the best rates and fees.
While this is not a promise or guarantee that you’ll be approved for the loan, you’ll have an estimated loan amount that can help you determine your house budget.
2. Save for a Down Payment
While some first-time home buyer programs help you purchase a home for as little as three to three-and-a-half percent down, here’s the truth: a higher down payment can help you get approved for a loan quicker and grant you access to lower interest rates, according to Experian.
Also, if your down payment is less than 20 percent of the home price, you’ll typically be required to pay annual Private Mortgage Insurance (PMI.) We know: 20 percent can be a of lot of cash to save up. For a $250,000 home, for example, you’ll need to save $50,000. And, while it’s a good idea to save as much money as possible before house hunting, it’s also important to buy a home you can afford. For this reason, it’s a good idea to talk to a real estate agent and mortgage lender to help you figure out how much home you can realistically afford to buy.
3. Boost Your Credit Score
An excellent credit score isn’t just for bragging rights. A score higher than 740 will allow you to get approved for a better mortgage with lower interest rates.
Not sure what your credit score is? You can fix this fast by ordering a free credit report through Annualcreditreport.com. With your credit report in hand, make sure all the information is accurate. If not, go through the proper channels to fix this (Annual Credit Report’s website helps you with this).
If you need to improve your credit score, there are many ways to do this. According to Randall Yates, founder of online mortgage marketplace The Lenders Network, here’s a good first step: “A simple way to increase your credit score quickly is by paying down the balances on your credit cards.”
“Try to get each card balance below 15% of the credit limit to maximize your score and improve your chances of getting approved with the best loan terms,” says Yates.
By doing this, you’ll be slowly but surely improving your credit utilization rate, which accounts for up to 30 percent of your credit score. You can figure out your credit utilization rate by taking the amount of your credit card debt and dividing it by your credit limit. For example, if you have $1,000 in debt and a $2,000 line of credit, your credit utilization rate is 50 percent. You can learn more about how to improve your credit utilization rate here.
4. Have a Steady Source of Income
Even if you hate your job, think twice before getting a new job immediately before house hunting. Why? Your work history and income paints a picture for mortgage lenders. A solid job makes you appear financially stable and reliable. And, you often won’t get approved for a loan if you’re unemployed or have only been at your job for a short period of time.
5. Get Pre-Approved
Once your finances are ready and you are actively looking for a house, it’s time to secure a mortgage pre-approval letter. A pre-approval letter is different from a pre-qualification letter because an underwriter investigates your finances top to bottom. There is no hiding a late payment or excess amount of debt from the underwriting process.
“The pre-approval process is very quick, and can be completed in as little as an hour,” says Ariel Szabo, a Boston-based real estate agent. “The one variable that could hold up the process is how long it takes you to submit the necessary documentation,” she explains.
What financial paperwork should you have ready to submit?
“At a minimum, your mortgage officer will need to review your taxes, proof of income, and statements of your assets and debts,” Szabo says. You should also have your driver’s license and social security number ready.
A pre-approval is a game changer. Once you have a pre-approval letter, you become a noteworthy buyer and sellers will know you can actually afford to buy the house.
Are You Homeowner Material?
Buying a home is an exciting adventure, but it is also a serious commitment. By following the 5 steps here and being prepared, you’ll be ready to start house hunting and hopefully snag your dream home.
This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.