How to Prepare Financially for a Home Purchase
Buying a house can be an exciting journey to first-timers, but it can also be daunting. The financial part is often the most stressful, but as long as you prepare well for this major expense, you should do just fine.
Applying for a Mortgage
The last thing you want is find out that you’re not financially qualified to purchase your dream home. Avoiding this scenario means having good credit, cash for closing, and a confirmable income.
Checking Credit Reports
Hopefully, this won’t come as a surprise – you need a good credit score to get a mortgage. 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 purchasing the property with a co-buyer (for example, your spouse), your credit score as well as that co-buyer’s will be considered by your mortgage lender. But even if the other person has a stellar score, don’t assume everything to be perfect. Finally, take note that it takes at least six months for your credit score to show some significant improvement, so it’s best get started as early as you can.
Saving for Your Deposit
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. This is usually some 3.5% to 20% of the purchase price. While saving up for your deposit, resist the temptation to invest in the volatile stock market with cash that you intend to use within a year or two.
It can be so tempting indeed when you know you can get a larger return on your money instead of sticking to a traditional savings account. At the same time, you don’t want to risk not having the funds when you’re ready to buy a house. As you save, don’t underestimate how much cash you’ll likely needs.
Preparing Documentation
Of course, in the end, it’s all about the documentation. Buying a house without all that paperwork is impossible – at least, if we’re talking about a legal transaction. Besides, you won’t get a mortgage if you can’t provide evidence that you are capable of paying off the loan. So don’t delay and start gathering those w-2s, bank statements, payslips, etc., as well as copies of your tax returns in the last two years if you’re freelancing or self-employed.
