So, you’ve decided to buy a home. Congratulations, you’re leaving the world of renting behind and investing in an asset you’ll come to cherish for years to come. But before you start researching homes, you’ll want to make sure your finances are in tip-top shape.
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After all, it’s next-to-impossible to pay for a home if your credit is in the gutter and/or you can’t afford a down payment. With those factors in mind, here’s a financial to-do list that will make the home-buying process easier.
1. Get a steady income
If you’ve spent the past few years bouncing from job to job, now’s the time to look for something more permanent. The reason: Changing jobs, especially at the last minute between the time a loan is approved and the close of escrow, can kill the deal, according to Joe Parsons, senior loan officer with PFS Funding in Dublin, California. Lenders always perform a verbal verification of employment within 24 hours of funding a loan, so the last thing you want to do is change your employment status and wreck your chances of having it go through.
2. Calculate your debt-to-income ratio
Every would-be homeowner should understand their debt-to-income ratio, or DTI, which has gross monthly income on one side and total debt on the other, Parsons said. Whether you owe money on taxes or a credit card balance, it’s important to see the big picture. DTI can affect borrowers’ ability to get approval for loans if their debt outweighs the money coming in. And, in some cases, a lender may say that in order to approve the loan, you’ll need to work on clearing your debt or even close an account. (You can learn how closing a credit account impacts your credit score here.)
3. Pay down debts
Knowing your debt-to-income ratio is one thing, improving it is another. If you crunched the numbers and don’t like the result, you’ll need to make changes, Parsons said. That may mean putting your credit cards on ice, learning the difference between wants and needs, and sticking to a budget to help prevent overspending. Not only will your credit improve over time, your DTI will look a lot better — to you and your lender.
4. Watch credit card payments
A recent change to Fannie Mae’s automated underwriting system on June 25 means trended credit card data plays a bigger role in mortgage approval. The new data shows not just your loan balance but whether you’ve made payments on time. So, if you’re known to slack on paying your bills, work on breaking the habit. You want to be considered a “transactor” — a borrower who pays their balances in full every month — not a revolver, who carries a balance.
5. Take a look at your credit
When considering a new line of credit, it’s important to know where your credit stands so you don’t find any surprises that throw a wrench in the loan-approval process, Heather McRae, senior loan officer with Chicago Financial Services, said via email. Your credit score helps determine your eligibility for various rates, so if you need to improve it, you’ll want to know sooner than later. (You can view two of your free credit scores, updated monthly, on Credit.com.)
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