4 Things To Do Now If You Want to Buy a Home in 2020
Buying a home may test your patience and may occasionally have you questioning whether you’ve made a terrible mistake. It’s a challenging process where you may find your efforts derailed by things beyond your control — like someone outbidding you for a home you like, or running into problems you have never faced before.
Those challenges and frustrations are real and you can’t eliminate them entirely. What you can do is get your finances in order and take these steps to make yourself the best possible buyer — someone that a seller would pick ahead of other similar (or even higher) offers.
1. Know your finances
For most people, buying a home means taking out a mortgage. Mortgage lenders will want to know if you can afford to pay back the loan, and to find that out, they will dig deeply into your finances. In a broad sense, lenders will want to know your income (for at least the past two years), your level of debt, and your credit score. They will also want to know how much money you have for a down payment (and, in some cases, where that money came from).
It’s important for you to understand your own financial picture before anyone else asks. Most lenders will, for example, roughly follow the 28/36 rule to decide how big of a mortgage you will be approved for. That means that lenders will see if your housing payment will be 28% or less of your gross monthly income while your total debt will come in at under 36% of your gross income.
That’s not a hard-and-fast rule. It is, however, a good guideline to understanding how much home you can actually afford.
2. Get your credit in order
You can’t change your income history quickly. Getting a raise or making more money may help change how a lender sees you, but it won’t alter the fact that mortgage companies examine your income history, You can, however, improve your credit score, and doing that will make you a more attractive candidate.
Much of your credit score is based on your patterns and history. About a third of your credit score is determined by your credit utilization. Basically, banks and other lenders want you to have as much available credit as possible. If they see you’re using more than 30% of your available credit, then they may view you as a risk.
Ideally, you will have no balances on any credit cards and will have significant credit available to you. There’s no exact formula for how much to have, but if you have limited credit, it may be worth opening a new line. The benefits of doing so will likely exceed the small hit your score will take when a credit card company checks your credit report. (Your mortgage broker or representative can probably help figure out the impact of opening a new line, paying down existing ones, or whether you should stand pat.)
3. Get a mortgage pre-approval
A mortgage pre-approval means very little but it shows sellers that you have done some work. It’s a document where a lender essentially says that it has taken a (quick) look at your finances and believes that you will likely meet its qualification for a mortgage.
This isn’t a binding document. The lender isn’t making you a commitment and you’re not committing to using that lender. What a mortgage pre-approval can be is an assurance to a seller that you’re probably going to be approved for a loan and that you understand the process well enough to put some work in before making an offer. That may be enough for your bid to be selected when there are multiple offers on the table.
4. Have your documents ready
Getting a mortgage requires filling out an application and having a lot of supporting documents. These generally include (but are not limited to) the following:
Two pay stubs covering at least one month of income (the most recent pay stubs are best)
Two years of bank account records
Two years of your taxes
Documentation on any gifts from family members toward a down payment (to show that it’s not a loan)
Records of any other financial holdings
Proof of any alimony or child support payments (made or received)
A lender may ask for more documentation than this, but it’s a good start. Having your documents in order just makes it easier when the time comes to actually apply.
Take it slow
Taken individually, applying for a mortgage looks like it requires a lot of steps. Don’t look at how tall the mountain is. Instead, focus on putting one foot in front of the other and getting there slowly.
There will almost certainly be bumps and course corrections along the way. Expect that the road won’t be perfectly smooth, but know that being proactive will make the process easier and help you handle any problems in a timely fashion.
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