Buying your first home is exhilarating. It’s a moment of real pride to be able to own your piece of the American dream. But it can also be challenging to get a down payment together, qualify for the home you want, and get through closing—if you don’t know what to expect and how to prepare. These tips from Redfin will help get you ready to buy a house in 2019—and maybe even enjoy the process along the way.
1. Check Your Credit Score
“Before applying for a loan and certainly before ever making an offer on a house, you should know your credit score,” they said. “Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will actually loan you.”
It may be that your credit score is already where it needs to be to qualify for a loan and secure a good interest rate. If it’s not, you may have some work to do to improve it. You can check it for free here.
2. Improve That Credit Score
If you haven’t yet talked to a lender when you go to buy a house in 2019, you likely don’t know exactly where you need your score to be in order to get a home loan with a low rate. But you can get a general idea of what it will require to qualify for an FHA loan. FHA loans are backed by the government and are the most popular choice for first-time homebuyers because they require only a minimum of 3.5 percent down and have lower credit score requirements.
If you do need help with your score, “there are a few things you can do now that will help raise your credit score so you can capitalize on a great interest rate,” they said.
- Take a close look at what’s on your report. There might be errors that can be easily cleared up. If you do find an error, “Use a credit report repair company to dispute errors. Your credit history is 35 percent of your FICO score, and according to a 2013 study by the Federal Trade Commission (FTC), more than 40 million Americans have something that is incorrect on their credit report. While a late payment or derogatory mark from a creditor may seem harmless, it can have long-standing consequences, in some instances staying on your report for seven years.”
- Watch your credit card utilization. “If any of your credit cards are close to the maximum utilization point, it will be a red flag to lenders, who see this as an indication that you could be having financial issues. If you have multiple cards, spreading the balance out between them could make sense. For example, instead of having one card that is 90 percent maxed out while two other cards have a zero balance, having a 30 percent balance on each card can help your credit score. Reducing overall debt is always the best option, but spreading out your balance can have a positive impact.”
3. Save Up For a Down Payment
It used to be that lenders were looking for no less than a 20% down payment from buyers. Today, 20% remains a benchmark because if your down payment is less than that number, you have to pay Private Mortgage Insurance (PMI), a type of insurance required by certain lenders to protect them in case you default. PMI can cost buyers more per month—“between 0.5% to 1% of the entire loan amount on an annual basis,” said Investopedia. But for those who don’t want to come up with such a sizable down payment when they buy a house in 2019, the tradeoff is well worth it. And, homeowners also have the option of refinancing later to get rid of the PMI.
4. Have a Healthy Debt-to-Income Ratio (DTI)
“Another key component banks and other lenders consider when issuing loans, and at what interest rate, is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn. So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but definitely, no more than 43% or you may not even qualify for a loan at all.”
The DTI also breaks down into the Front-End DTI, which “typically includes housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.” The Back-End DTI adds in all other debts, like your car loan and credit cards. “You want a back-end DTI of 36% or less.” Lowering the Back-End DTI is typically easier because, while the costs related to the house you want to buy probably aren’t going to change, you can pay down (or pay off!) credit cards and other outstanding debts.
5. Budget for Extra Costs
Most people who have never bought a home before typically know about the down payment, even if they’re not sure how much it will be. But, first-time buyers are often caught off-guard when it comes to some other fees involved. “There are a lot of little costs that go into buying a house that are overlooked by new home buyers all the time,” they said. “Though there are some things, such as sales tax and home insurance, that can be wrapped into a home loan and monthly mortgage, there are several little things that cannot be included into the home-buying package and need to be paid for out of pocket.
They can include:
- Home appraisal fee
- Home inspection fee
- Geological study
- Closing costs
- Utility hookup/start fees
- HOA fees
Be sure to ask your lender for an estimate of these fees as soon as possible so you have time to get the money together when you buy a house in 2019.
6. Don’t Close Old Credit Card Accounts or Apply for New Ones
Your lender will undoubtedly give you a rundown of the credit do’s and don’ts when applying for your loan and when you’re in escrow on a house, but two of the most important tips are to keep existing credit card accounts open and refrain from opening new ones. “Closing a credit card account will not raise your credit score. In fact, in some cases, it may actually lower it,” they said. “Instead, try to pay down the balance as much as you can, while continuing to make your monthly payments on time. If you have an old credit card you never use anymore, just ignore it, or at least don’t close it until after you have purchased your new home. Opening new credit cards before buying a home is also not a good idea. You don’t want creditors checking your credit or opening new cards under your name, as you may lose some points on your credit score.”
7. Don’t quit your job!
Your employment history weighs heavily with lenders when you buy a house in 2019. Even if you have a better job with a higher salary lined up, you could run into problems with qualifying for your loan if the bank sees you as a risk because of your lack of long-term employment. “Lenders like to see a borrower with the same employer for about two years,” they said.
8. Pay attention to Interest Rates
Your lender will surely be paying attention, but it’s also important for you “to know what interest rates are doing,” they said. Rates can drop unexpectedly, and, when they do, you may want to take advantage of a rate lock. “Since interest rates can fluctuate daily, consumers can use rate locks to protect themselves from increases while they wait to close on their loan,” said Bankrate.
9. Get Pre-approved
You may have done the math and come up with an equation for how much you think you can afford to pay for a house, but that doesn’t necessarily mean it will line up with what the bank thinks. Getting pre-approved is an important first step when buying a home because it determines how much home you can buy. You don’t want to fall in love with a new home in Ventura only to find out that it’s more than you’re approved for. Getting pre-approved will also allow you to move quickly when that model home is released for sale instead of having to get lender approval on the spot, and potentially losing out to another buyer.
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