Get Your Finances In Order To Purchase Your Next Home Blog

You have decided to buy a home. As one of the biggest purchases you’ll likely make in your lifetime, navigating the steps to finance your home can be a daunting experience. Like most big-ticket consumer purchases, knowledge is power. If you take the time to do your research and shop carefully, you will have a successful home-buying experience. Before you begin your home search you need to make sure you have your personal finances in order. A few simple steps in the beginning will make your home buying experience a much easier and less stressful process in the end.

Pay Down Your Debts. As you begin preparing your finances for the purchase of a new home, you might see the term “debt-to-income ratio” (DTI). Your DTI compares how much you owe each month to how much you earn, which is expressed as a percentage. This percentage helps lenders gauge how well you manage your monthly obligations and if you can afford to repay a loan. In general, the lower your DTI, the more likely you are to qualify for a mortgage. You must have a DTI ratio of 43% or less to be eligible for a qualifying mortgage, which is a home loan that complies with regulatory regulations to safeguard lenders and borrowers. Remember, 43% is the maximum DTI ratio. Usually, lenders prefer ratios of no more than 36%.

Save for a Downpayment. Shopping for a home is always more fun than saving to purchase that home. However, greater initial ownership of your new property results from a larger down payment.  A larger downpayment allows lenders to view you as a lower-risk borrower, which typically results in a lower interest rate on your mortgage. A good rule of thumb is to have a minimum of 10% of your homes cost to use as a downpayment but providing 20% will help you avoid PMI charges. PMI (private mortgage insurance) is a type of insurance policy that protects the lender if a borrower defaults on a home loan.

If you plan to use the proceeds from the sale of your current home as a downpayment, it is still a good idea to have an “emergency fund” set aside. This will help with costs associated with getting your home ready to sale as well as those costs incurred in the purchase of your new home to include inspection fees, and any closing costs involved. 

Get Pre-Approved. Once you’ve gotten your household finances prepared to purchase your new home, the next step is to find out how much you can borrow. The best way to do this is to go through the mortgage pre-approval process. Pre-approval will allow you to make the strongest offer possible on the property you choose. Being pre-approved is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check. If you’re preapproved, you’ll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.

The pre-approval process is also a good time for you to figure out how much you can comfortably spend on your monthly mortgage payment. It is a good idea to keep your payment no more than 25-28% of your current take home pay. When figuring this expense, you will need to take into consideration principal, interest, property taxes, home insurance and private mortgage insurance (PMI). You will also need to keep homeowners association (HOA) fees in mind when figuring this cost. Using a mortgage calculator will allow you to see different home prices within your budget.