The year is quickly coming to an end. Before long, we will be wrapped up in the holiday season and ready to ring in 2018. If you are thinking about buying a home next year, there is no better time than now to start planning.
There are several personal finance issues that you’ll want to keep in mind, as well as actions you can start taking to be fully prepared for that giant leap into homeownership. Buying a home is a major commitment. Start improving your financial health now, so you can be completely ready for a successful home purchase in the near future.
1. Manage Your Credit
Your credit profile will be very important when it comes to getting approved for a new mortgage, or even just getting the best possible interest rate locked in. Your credit profile is more than just your credit score. Your credit history will be factored in along with other measurements of credit stability.
Mortgage lenders want to know you are a worthy candidate for a home loan, which is why you can start taking better steps. If you already have perfect credit ratings and a score of 740+, then you don’t have to worry. Otherwise, get any credit dings cleared while you can, including credit card debt, student loans, short sales/foreclosures, bankruptcies, etc. In most cases, re-building one’s credit after major debt or establishing new positive credit profiles will take time. The longer you wait, the worse position you will be in when applying for a home loan.
You don’t have to have perfect credit to qualify for a mortgage loan. However, the more steps you can take now to improve your credit profile, the better off you will be when you apply.
Recommended Action Item: Talk with a mortgage professional or your financial advisor. Get a credit check and get professional guidance toward improving your credit profile at least several months before buying a home.
2. Save Money and/or Pay Down Your Debts
The more cash you have to put down toward your loan, the lower your monthly payments will be. That’s why you should be saving money more aggressively. Even if you are okay with larger monthly payments, having that cash in the bank is a valuable safety net.
The other consideration here is to pay down your existing debts as much as possible. Lenders will factor in what’s called the “debt-to-income ratio,” which effectively measures your monthly cash flow and helps determine if you will be able to make your mortgage payments from month to month. The more debt you have, the less you can qualify for with a mortgage.
Recommended Action Item: Start by paying off any debts with high interest rates. Then, you can start boosting your cash savings. Cut down to one or two credit cards (ideally revolving credit like Amex) and maybe an auto loan. Aim to get 10-20% cash saved toward your down payment.
3. Focus on Your Monthly Budget
As you prepare to buy a home, your personal monthly budget becomes even more important. In the immediate future, it will be about putting as much extra money as you can toward saving for a downpayment and/or paying off high-interest debts. Then, you have to also think ahead about your mortgage payments, homeowner’s insurance, HOA dues, home improvement costs and all other expenses associated with owning a home. Make sure your monthly budget can handle everything you’ll be responsible for as a homeowner.
Recommended Action Item: Talk with a financial advisor or use online finance management tools to calculate your budget and determine what you will be comfortable with from month to month.
4. Pay Attention to Your 2017 Tax Return
Mortgage loan underwriters will look carefully at your past two years of tax returns. Certain write-offs will be deducted from your income, especially if you are self-employed. If your tax returns are overly aggressive with deductions, realize that some of those may hurt you when qualifying for a mortgage. As you are preparing this year’s tax returns, let your tax preparer know that you are looking to buy a home soon. It may impact what you choose to write-off.
Recommended Action Item: Get pre-approved for your mortgage before filing your 2017 tax return. It will help you know if you need to be more conservative with your tax return or not.
5. Select the Right Mortgage Professional
You can choose to do all this on your own, or you can get the help of a professional. If a home purchase is in your future, then it really makes sense to find and select a good mortgage expert to help guide you through the process. They can help you through all the preparation steps above and get you set down the path toward pre-approval for a mortgage.
Recommended Action Item: Interview several mortgage professionals in your area. Make sure they understand your goals and will help you through this process.
If you are in San Diego County, Orange County, Riverside County or Los Angeles County, call Transparent Mortgage today at (619) 929-0199. My team and I will help you take all the positive steps you need to secure the best possible mortgage and ultimately get into your next home.