Even if you’re years away from putting in an offer, it’s never too early to start designing your dream financial situation.
Love a good vision board. Where do I start?
With a budget. Lenders have a lot of opinions about how much house you can afford. Since they hold the keys to your future mortgage, it’s a good idea to pay attention.
One popular guideline is the ‘28/36 rule.' That’s when you spend no more than 28% of your monthly gross income (what you make before taxes) on housing costs and a max of 36% on debt payments. That includes your potential mortgage payment, plus credit cards, student loans, auto loans...whatever you’ve got. Psst...online calculators can help you with that math.
If the sale price on your dream home demands a lot more of your paycheck, you might have a harder time finding a lender willing to write you a check. One way to lower both percentages is by putting down more money upfront.
How much down payment are we talking?
Experts say 20%. Yeah, that’s a lot. But getting all the way there means you can avoid paying private mortgage insurance (PMI). That’s a fun little ‘extra’ lenders tack on when they think you’re a risky borrower. A bigger down payment also means you own more of your home right off the bat, so it’s less likely that you’ll ever be underwater (more in debt than the house is worth).
Oh, and writing a big check upfront can also help you get a better interest rate.
Sounds like a good thing. What else affects interest rates?
Your credit score. That's another way lenders know whether they can trust you not to ghost on your payments. This three-digit number usually goes from 300-850. You don't need to be perfect, but try to get to 750. That’s ‘A+ borrower’ status to a lot of lenders and will probably get you qualified for the best rates available.
The lower your interest rate, the less you’ll pay your lender over time. Paying just 1% more in interest can mean owing thousands more over a 30-year mortgage.
What if my credit score is less than 750?
It’s never a bad idea to work on improving your credit if you’ve got some time before you’re ready to buy. If you can make it to the 700s, your chances of qualifying for a decent interest rate are pretty good.
If your credit score is lower than 650, you might want to hit pause on your home-buying plans until you can get your score up. Getting rid of debt and paying all your bills on time go a long way. Pro tip: Set up auto-bill-pay and say ‘bye forever’ to late fees.
Getting ready to buy a home is a BIG financial step. So give yourself plenty of time to get your bank account ready. If you can get your debt down and your down payment and credit score up, you’ll probably get the VIP treatment from mortgage lenders. Cheers to a new home and no new financial stress.
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