Purchasing a home will most likely be the most expensive purchase you make in your lifetime. But when it comes to buying a home, there are numerous financial barriers you might face. Finding a home and saying, “that’s the one!” isn’t so easy. You need to know all the financial requirements you need to meet in order for you to qualify, such as a mortgage and homeowners’ insurance. Knowing this important financial information well in advance can help you prepare and make the right decision. Take a look at four financial considerations you need to know before purchasing a home below.
1. Save up for a sizable down payment
In order to buy a home, you need to place a sufficient down payment. After the 2008 market crash that disproportionately hit the housing industry, loan lenders are being more cautious and requiring borrowers to put more money upfront. Doing so limits the risk of a borrower defaulting on their mortgage.
In order to save up money for a sizable down payment, it’s important you begin budgeting well in advance. To create a budget, look at your expenses and income and determine whether you’re spending more than you’re earning. If this is the case, it’s time to make a few lifestyle changes to get out of the red. For example, if you go out to eat often, expensive restaurant meals can put a hole in your wallet. Instead, make homemade meals at home that last a few days and save money in the long run. There are plenty of areas you can save money, so take a look at your finances and put any extra money toward your new home.
2. Improve your credit score
Your credit score can make or break your home buying decision. If you have a poor credit score, lenders will view you as a risky investment and either tack on an extremely high-interest rate or not allow you to apply for the loan at all. For example, VA loan eligibility requirements state you need a FICO score of at least 550. Anything less, you won’t be able to take out a loan.
If your credit score has seen better days, there are a few things you can do to fix it. To improve your credit score, consider these tips:
- Pay your bills on time
- Pay off any debts and keep your credit balance low
- Only open new credit accounts when needed, too many credit lines can hurt your score
- Don’t close any unused credit cards, as closing an account can increase your credit utilization ratio
- Call your credit card company to dispute any mistakes on your credit report
Getting your credit score in shape should be at the top of your list as you begin to search for a new home. If you can’t pay your credit card balance on time, mortgage lenders will think you won’t be able to make their loan payments on time, either.
3. Search for a low-interest rate
Once you begin searching for a mortgage lender, look for ones that offer a low-interest rate. Over the course of your mortgage, you will accrue tens of thousands of dollars in interest, which means every percent counts. The difference between a mortgage with a 5 percent interest rate and a 4.5 percent interest rate can be thousands of dollars over the course of your mortgage contract.
To ensure you get the lowest interest rate possible, take time to do your research and shop around. Look at local and national mortgage lenders and compare prices. You should even check your current financial institution, as they may be willing to cut you a deal since you already do business with them. You can find competitive mortgages from credit unions, online banks, and traditional banks. You should also use a mortgage calculator to compare the interest rates provided by different lenders.
4. Don’t forget closing costs
Your down payment isn’t the only thing you need to write a check for. There are going to be a few closing costs you need to factor into your budget, such as closing agent fees, attorney fees, credit report fees, processing fees, and underwriting fees.
Buying a home is a big deal. There are a lot of moving parts that you need to consider to ensure you make the right decision. With these four financial considerations to know before purchasing a home, you’ll have peace of mind knowing you made the right choice.