1. Get your credit score to 700 or above. This is super important! Your credit score will determine what type of loan you qualify for and what type of interest you would be getting. Your credit is made of 5 basic things: payment history, credit utilization, how long you've had credit for, what new credit you have (in the last six months to one year), and what type of credit you have. You want to raise your credit by making payments on time, paying off anything owed as quickly as possible, avoid consolidating debt or moving it around by opening up a new credit card (this looks bad to lenders), and making sure you don't have any maxed out credit cards by keeping balances low. These are just a few ways to raise your score and I am certainly not a financial advisor so if you need help with this make sure and talk to someone who can help you.
Step 1B: Get rid of as much debt as you can. Your debt to income ratio plays a huge part in purchasing a home. Your debt to income ratio should not exceed 43%. If it does exceed that you will most likely not qualify for a home. Debt to income ratio is all your monthly debt payments divided by your gross (what you make before taxes) monthly income. For example if you have a car payment around $600.00 a month, medical bills that total $200.00 a month, credit card debt totaling $200.00 a month, student loan payment totaling $100.00 a month that is $1100.00 a month. If you make around $3200.00 a month (gross) then your debt to income ratio is 34%. If you add a monthly mortgage payment of $1000.00 onto that then your total debt is $2100.00 a month and your debt to income ratio is 65% which is too high and you most likely wouldn't get approved.
Basics of it are you want to eliminate debt to increase the debt to income ratio so when they add a mortgage onto your debts you would be able to qualify. Just eliminate debt!!
2. After you have done everything you can to get your credit score up and get rid of as much debt as possible you will want to save money for a down payment. It's recommended that you save 20% of the house price as your down payment. So if you are purchasing a home for $200.000 then you would want to have $40.000.00 saved up for a down payment. That is ideal and probably not realistic for most people. If you did that you would be in the best financial situation but it's not always achievable.
First time home buyers usually qualify for an FHA loan and you can have a smaller down payment. I suggest (after figuring out what we would need to get this loan) saving about $6000.00 for a down payment. Sometimes it's less, sometimes more depending on your area but that is a good start.
3. After saving for a down payment you will also want to save earnest money. Earnest money is something you give to the seller to confirm that you really are going to buy this house and they can go under contract with you. We needed $1000.00 in earnest money. I don't know if everyone will need that much but that's a good start.
4. Now that you have raised your credit score, eliminated debt, and have about $7000.00 (suggested you can do less just talk to your mortgage company) saved up it's time to get pre-qualified. You can get pre-qualified by talking to a mortgage company, your bank, etc. We went through a mortgage company First Colony Mortgage and we really liked them. Basically they will go over your finanical situation such as your credit score, what debts you have, how long you have been at your job (at least a year), and how much you make. Zack and I based our house off of Zack's income only because we want the option for me to be able to stay at home and not work down the line. If we added my income in we probably could have qualified for a much larger house. Make sure and think about those types of things, are you always going to be working, etc.
4B. They are going to ask for a lot of financial records during the qualification process such as your Tax Returns from the past two years, W2s from the past two years, bank statements from the last 3 months, pay stubs from the last 3 months. They are looking for consistency, making sure you will be a stable person for them to lend to so you want to make sure your financial history reflects stability.
Once you are pre-qualified for a house you can start looking at houses. I will probably do another blog post on what things to keep an eye out for (now that we know better) and what the qualification process is like after you've found a house you like.
If you are thinking of purchasing a home I hope this was helpful for you. I know a lot of this information would have been helpful for us because we honestly went into the process without knowing a lot about buying a home. Somehow we managed to do it all just fine but we would have been more financially prepared if we had known more.
Anyway thanks for reading and next blog post I am going to talk about my what books are on my reading list for 2017. Can't wait to share that with you all!
Caitlin
