How to Financially Prepare for the Home Buying Process

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Buying a home is a monumental financial undertaking. Before you jump into this process, it is important that you have a clear understanding of how it will impact your finances so that you are empowered to make the best decisions. Here are five things to keep in mind as you prepare financially for the home purchasing process.

Understand How Much You Can Afford

The first thing to do before starting this process is to figure out exactly how much you can afford. Keep in mind that purchasing a home involves more than just the mortgage payment. You will also need to factor in property taxes, homeowners insurance, and home association fees. If you are putting down less than 20% of the total price of the home, you will be on the hook for private mortgage insurance (PMI).

Lastly, be sure to consider all of the costs associated with home maintenance. If you have never owned a home before, you may be taken off guard regarding how costly it is to maintain a home. There are a variety of convenient online mortgage calculators that will help you to zero in on this figure with accuracy.

Repair Your Credit

Do not even think about looking at homes until you have cleaned up your credit report. It is always important to stay on top of your credit score but this task becomes even more vital when you are getting ready to apply for a mortgage. This little number is the primary factor that lenders will look at when determining your creditworthiness.

You may be surprised at the number of mistakes that you find in your report. Taking the time to comb through this report and repair any issues can have a significant positive impact on the mortgage rate that you are offered as well as much you qualify to receive. There are a number of credit monitoring services that can help you to keep track of this important information so that it does not hinder your ability to get into the home of your dreams.

Get Your Legal Matters in Order

If you have any outstanding legal issues, now is the time to get those cleared up. You do not want to enter the home purchasing process with any of these issues hanging over your head.

This is also important if you are looking at a home that is going through a foreclosure. Consulting a mortgage attorney in NJ will put you in touch with a qualified professional to help guide you through this process. This type of attorney will also help you to navigate this process if you have gone through personal bankruptcy. Do not leave these legal issues to chance.

Be Mindful of Your Debt-to-Income Ratio

Financial experts will also advise that you are mindful of your debt-to-income (DTI) ratio. This number indicates how much additional debt in the form of a mortgage you can afford to take on. The figure measures your monthly expenses in comparison to your income.

While there are always some exceptions, most lenders will recommend that your future mortgage payment does not exceed 30% of your total income. In addition, all of your debts along with the mortgage should not exceed 40% of your income level. If you know that you are approaching or exceeding these percentages, you would be wise to pay down the debt balances before applying for a mortgage.

Obtain a Mortgage Pre-Approval

Before you start scrolling through available homes and getting your heart set on a particular property or neighborhood, it is a good idea to obtain a mortgage pre-approval. A qualified lender will go through your credit and DTI ratio to calculate how much you can afford. It is a smart practice to apply with several lenders so that you can compare quotes and determine the best path for your personal finances and needs.

The prospective lenders will offer you a maximum loan amount in addition to a quoted interest rate that is good for a set period of time. Having this pre-approval in hand will make you a more attractive buyer, putting you in a better position to secure the home that you want.

Paying attention to these five factors will ensure that you are ready to take on the financial commitment that comes with purchasing a home.