How to Get Your Finances in Order Before You Start House Hunting
When it comes to buying a home in the St. Louis area, the sooner you prepare, the better off you will likely be. Thinking about your finances well in advance means you will have more time to build your credit, work on any debt, and save as much as possible for a down payment and other expenses that come with homeownership. Carefully preparing your finances makes you more likely to have a higher budget and qualify for lower interest rates on your mortgage. Here are some tips on how to get your finances in order before you start house hunting.
1. Do a credit check
You should have a good idea of what your credit score is. A good credit score means that you will typically qualify for better interest rates, increasing your purchasing power, and decreasing the amount you pay on a loan over time.
Lenders will often require a minimum credit score, so if yours is on the lower end, the first step will likely be to speak with a lender about what they require and the steps you can take to increase your score to a point where loan approval will become possible.
2. Determine your debt-to-income ratio
Debt-to-income ratio (DTI) is a number that lenders will use in order to decide if you qualify for a home loan. It is an important part of your overall financial health, and it compares how much you owe each month to how much you earn. It is calculated by doing the following:
Step 1: Add up your monthly bills such as rent/house payment, child support or alimony, any loans, credit card payments, and other debts. For the purpose of mortgage approval, monthly expenses such as gas, groceries, and utilities are generally not included in this number, but you should still have an idea of what those are in setting your general budget.
Step 2: Divide the total monthly payments by your gross (before taxes) monthly income.
The result in the form of a percentage is your debt-to-income ratio. The lower this number, the less risky lenders will see you. Your lender can tell you what they require specifically when it comes to your DTI.
3. Save for your down payment
Most loans will require some kind of down payment. This is an amount of money that you must put towards your loan when you close on your new home. It is typically anywhere from 5%-20% of the purchase amount, but varies between the different loan types. The best way to prepare is to begin saving well in advance. Your lender can give you an idea of how much of a down payment you will need.
4. Determine your household budget
Sit down and write out your monthly income and expenses and don’t leave anything out! Just because you might be able to get approved for a particular amount does not mean you are necessarily going to be comfortable spending that. You should put on paper every detail of your finances and decide how much money you will be comfortable spending each month on your new home. If you do not currently own or rent, make sure you factor in new household expenses such as utilities, household supplies, etc.
A great first step, even if you are not quite ready to begin searching for homes, can be establishing a relationship with a real estate professional who can guide you through the process, even before the official home search begins.
Our St. Louis Area real estate experts have helped countless home buyers. We can help guide you through the entire process, from preparing your finances and recommending local, trusted lenders, to closing day…and beyond. Do you have questions about how you can start preparing to buy your next home? Contact us or complete the form below and we will be in touch!