If you are like most individuals, buying a home is the biggest purchase you will make. Before you take a look at your finances to determine if you can pull off this purchase, make sure this goal is in your best interest.
Begin by deciding which city or neighborhood you'd like to live in at this point in your life. If you are just starting out in your career, you might be better off with the flexibility that comes with renting. This way, if an excellent employment opportunity arises which requires a move, you will be free to accept it. Perhaps you are not ready to settle down with a life partner. It generally does not pay to buy a home you'll only live in for a few years before selling.
Next, think about the financial ramifications of this purchase. A mortgage is a huge financial responsibility. Are you ready for that right now? Adding a mortgage payment may require you to drastically reduce discretionary spending.
Getting started: Boost your credit
Once you've determined now is the right time to buy a house, you will want to start improving your credit. Your credit score is a leading factor that lenders consider when deciding if you're eligible for a mortgage. You score also helps determine the interest rate you will receive.
Here are some ways you can boost your credit score in the months leading up to your mortgage application:
- Pay all your bills on time. Set up automatic payments to make it effortless.
- Keep your credit utilization at less than 30 percent.
- Pay your credit card bills in full, and before they're due.
- Don't close old accounts or open new cards. You want your credit history to be lengthy, and both of these steps can significantly bring down your average.
How high is your DTI?
If you are still carrying student loan debt, you might think it will be difficult to obtain a mortgage. In fact, a 2018 Student Loan Hero survey found that 43% of college-educated Americans with student loans postponed buying a home because of their student debt.
Lucky for you, there is very little truth to this concern. A student loan that is handled well should not be a deterrent to getting a mortgage. To make sure you're managing your student debt responsibly, set up automatic monthly payments on your loan so you never miss a payment or a due date.
In addition, make an effort to repay your loans as quickly as possible so it doesn't reflect badly on your debt-to-income (DTI) ratio. Since taking out a mortgage means accepting more debt, lenders are careful to check that you aren't carrying too much other debt. Ideally, your total debt payments, including your mortgage, should account for less than 36 percent of your income.
If your DTI is on the high side, you may not be eligible for a mortgage just yet. Consider refinancing your loans to lower your interest rates so you can pay it off sooner. Then you can apply for a mortgage when your DTI improves. You can also look for ways to increase your income to tilt your debt ratio in your favor.
Determine how much house you can afford
Before you start shopping for a home, find out how much house you can actually afford. The best way to obtain this information is by applying for a preapproval from a mortgage lender. This will tell you exactly how high you can go while showing sellers that you're serious about buying.
If you won't need your pre-approval just yet, but you'd like an idea of how much you'll need to save for a down payment, you can use our online mortgage calculator to get your magic number.
Start saving for a down payment
Once you have your numbers worked out, you'll need to save up for a down payment. Trim your budget in any way you can and look for side hustles to boost your income and make saving simple. Then, set up an automatic monthly transfer to your Horizon Savings Account so your money can grow while you sleep.
At this point, you may want to look into a local down-payment assistance program or a federal loan program, such as an FHA loan, which only requires a down payment of 3.5 percent. If you live in a rural area, you might qualify for a USDA loan, and if you've served in the military, you're likely eligible for a VA loan.
When you're ready to take this step forward, call, click, or stop by Horizon to find out about our home loans. Our fantastic rates and hassle-free pre-approval process make a Horizon mortgage an excellent choice!