Getting Your Financial “Fitness” Ready Before Buying a Home

Dated: June 26 2021

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Getting “Finance-ready” For Your New Home – Part 1

The very first step to take when you decide to buy a new home, especially as a first-time homebuyer, is to prepare your finances for the mortgage lending process. Qualifying for a mortgage is probably unlike any other credit application process you’ve gone through, especially if it’s your first time.

Preparing your credit ahead of time will not only streamline the application and approval process, but help you qualify for better borrowing terms, or being able to borrow a larger amount.

Some simple steps you should start taking about 6 months before you begin your home search:

  1. Pay down your existing debt
  2. Check your credit report for accuracy, and file disputes to remove inaccurate information
  3. Know your FICO score and what factors led to your result – this will help you target the most important problem areas with your credit to focus on first (i.e., balances too high, late payments on certain accounts, etc.)
  4. Never open or apply for new credit accounts until your new mortgage loan closes

Within 30 days of starting your home search, your credit file should look better – you are aiming for a clean credit file and the best FICO score given your current circumstances. However, your FICO score is a secondary measurement for most lenders – they are primarily looking at your debit to income ratio.

Your debt-to-income ratio is all of your monthly debt payments divided by your gross monthly income.  This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

A debit to income ratio of 43% is the generally the absolute maximum allowed and still meet the requirements for a qualified mortgage – anything higher, and your chance of qualifying for a standard mortgage at market interest rates is unlikely and we will need to work with non-standard lenders.

Most lenders will look for a debt to income ratio of no more than 36%, so you want to try and hit or better this number before applying for a mortgage – not only will it help get you qualified, but it will give you more confidence in being able to pay the mortgage along with your other debts.

Getting “Finance-ready” For Your New Home – Part 2

The next step in getting ready for your new home search is making sure you’re at least pre-qualified so we’re looking at homes in the right price range, but in fast moving markets like Southern California, many sellers will not review offers from buyers who are not pre-approved, while many builders while require pre-approval before accepting an offer.

So what is the difference?

Pre-qualified is the less certain of both options. When you are pre-qualified, a lender is issuing a statement based on their evaluation of your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount. The most useful purpose of a pre-qualification letter is knowing as a buyer, exactly how much home you can afford.

Pre-approval is a more definitive statement from a lender that based on a more in depth review of your credit, that lender has approved you for a mortgage of a certain amount, subject to a successful home appraisal and no changes in your credit file before closing (remember: never open new accounts, increase credit balances or limits, or apply for new credit until your loan closes! Doing so could result in the loan being denied before closing).

Pre-approval may also give you an advantage over other buyers who submitted offers for the home you are interested in, if they lack pre-approval themselves.

While many prospective buyers will opt to start with a pre-qualification, I suggest we work together with your lender, or I can refer you to a great lender in our network, to get you pre-approved and in a stronger and more confident position to look at the right homes in the right price range, and to be able to make an offer without needing to go back to your lender for additional approvals.

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Steve Enchin

I've grown up in a real estate family with multiple commercial and residential multi-family properties, and bought/flipped/sold multiple properties, and have been guiding my own network in the purchas....

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