It can take almost a full year to get your finances in line before you buy a home, housing experts say.
So if you know you want to buy a house within the next six months or so — such as people hoping to make the leap in the spring — you should start your financial housekeeping now.
Preparing sooner rather than later can increase your chances of landing the lowest interest rate possible, which can lead to thousands of dollars in savings over the life of the loan. People who skip some of these steps may miss out on their dream home or delay their plans.
Here is a checklist of sorts to give you your best shot at landing a good deal:
Know your budget. Before you start browsing real estate listings, talk to a lender to get a sense of what you may be able to afford. After reviewing general information about your finances, such as your income, assets and debt, the lender can give you a prequalification letter, which says how big your potential mortgage could be. This information can help you figure out what price range you should target and what neighborhoods you can buy in, says Keith Gumbinger, vice president of the mortgage information website HSH.com. But keep in mind that the prequalification letter doesn’t guarantee the loan.
Use the letter to start calculating other expenses. Estimate what closing costs might be. Closing costs are typically a percentage of the purchase price. Potential home buyers should also research what property tax rates are in the neighborhood they’re considering.
Check your credit report. If you haven’t checked your credit report in the past year, you definitely want to take a look now. Consumers can receive three free credit reports a year, one from each of the main credit reporting bureaus, on AnnualCreditReport.com. Make sure all of the loans and accounts listed under your name actually belong to you and that the account balances are accurate. It can take several months to have an error removed from your credit report.
Maximize your credit score. Boosting your credit score can increase your chances of being approved and help you land a lower interest rate on your loan, says Jonathan Smoke, chief economist of realtor.com. Consumers may have a hard time being approved for a mortgage if their credit score is below 625, Smoke says. Consumers with credit scores above 700 can qualify for lower interest rates, and the best offers are available to people with credit scores of 750 and up, he says.
You can lift your score by establishing several habits in the months leading up to the purchase, housing experts say. The first thing to do is to make sure to pay your bills on time, since payment history is the number one factor that goes into a person’s FICO score. It also helps to bring down the balances on each credit card to below 30 percent of the available credit. Most people should also hold off on opening or closing credit cards until after they’ve purchased the home. Applying for a new card requires a credit check, which can ding your credit score. And closing a card can also lower your credit score by reducing your credit history or making it seem like you are using a larger share of your total credit.
Figure out what your down payment should be. Some buyers in competitive housing markets may benefit from providing a larger down payment. But don’t assume you need to give 20 percent down. Some people can make smaller down payments if they qualify for certain programs, such as those offered to veterans and first-time home buyers.
Shop around. Many homebuyers go with the first offer they receive when it comes to mortgages, according to a report from the Consumer Financial Protection Bureau. You should start requesting quotes 30 to 45 days before you want to buy the house, Gumbinger says.
Before you see homes, get a preapproval letter. Once you’ve chosen a lender, you should request a preapproval letter, which outlines in more detail how much you might be able to borrow. Unlike a prequalification letter, a preapproval letter tells the seller that lenders have actually vetted your finances and confirmed that you qualify for a loan — giving you a possible edge over buyers who can’t prove they will get financing.