Buying a house is usually an exciting experience but also a daunting one for first-timers. The most stressful part is often the financial preparation needed for this big expense, but armed with the right information, you should do perfectly fine.
Getting a Mortgage
You don’t want the surprise of learning that you’re not financially qualified to buy the dream house you’ve found after a long search. Avoiding this scenario means having good credit, cash for closing, and a confirmable income.
Checking Credit Reports
It’s no surprise (hopefully) – to get a mortgage, you need a decent credit score. Start checking your credit reports for errors and may consider paying a daily credit score monitoring service for this.
A quick way to improve your score is to pay down your existing balances and stop using your cards for at least 60 days before submitting your mortgage application. Also steer clear of getting new credit until you’ve closed on your new home.
If you’re buying the property with a spouse or any other co-buyer, note that your mortgage will consider both of your credit scores. But even if the other person has a stellar score, don’t assume everything to be perfect. Finally, note that six months is the minimum amount of time your credit score can show significant improvement, so begin as early as possible.
Saving Cash for a Down Payment
Aside from ensuring that your credit score is looking great, you’ll also want to plan for the money you’ll need to make a deposit. Expect this to be about 3.5% to 20% of the purchase price. While saving cash for your down payment, resist the urge to make those volatile stock market investments with money you will be using in a year’s time or even in two.
The thought of earning a bigger return on your cash than a regular savings accounts can offer, is indeed tempting. At the same time, you don’t want to risk not having the funds when you’re ready to buy a house. While saving, never underestimate the amount of money you might need.
Of course, at the end of the day, your documents say it all. You can’t purchase a house – at least not within the protection of the law – without all those papers. Besides, there’s no way you can get a mortgage if you can’t prove that you have enough income to pay off the loan. So start collecting those paystubs, bank statements, w-2s, etc., and if you’re a freelancer or self-employed, copies of your tax returns in the last two years.