4 Things to do Before Buying Your First Home
Buying your first home is both exciting and stressful but there are several basic financial steps you can take to reduce the stress and make your new home purchase go more smoothly, letting you enjoy more of the process. Lending requirements have changed in recent years but these preparations are the golden rule of getting ready to buy a home.
1. Collect and organize your documentation.
Ideally, you want to save and organize your paystubs from the last six months. Go through your tax returns for the last few years and sort out your W-2s or 1099 forms. Organize your old bank statements and make sure you have copies of your cancelled rent checks for at least the most recent three months. You may need these to show your ability to cover down payment and closing costs. If you have other assets, including investment accounts, a 401k, or other financial resources, you may be required to furnish your most recent months statements from those accounts. While nobody finds this part of the process much fun, it's important because borrowers with incomplete or missing documentation often get less favorable terms on their mortgage than buyers who have complete information.
2. Check your credit.
If you haven't checked it recently, now is the time. If there are problems or discrepancies, start to clean your report up now if you can. A higher credit score can enable you to get a lower interest rate on your mortgage. You can and should request your credit report every year and you get can it annually for free at annualcreditreport.com.
3. Start saving and work to reduce your debt.
Having savings and being able to show that you have ample reserves can help in the loan approval process. Your savings can also be used for your down payment and your closing costs. Redo your monthly budget with an eye toward trimming your expenses so more of your income can go into savings. At the same time, stop taking on new debt. Buying a big-ticket item like a new car is never a good idea when you are going through the home loan process. Wait until after you have closed on the new house to think about major purchases. Even buying new furniture before your loan closes can trigger red flags to the lender. This is also a very good time to pay off or pay down your credit cards as much as possible.
4. Get Prequalified or preapproved.
Knowing that you have been prequalified or preapproved shows your real estate agent and potential sellers that you are serious and prepared. It also means that you know just how much your bank will allow you to borrow before you start looking at homes and fall in love with something you won't be able to buy. And it means that you won't lose out to another buyer because you have to wait for the loan approval to come through. The more organized and efficient you are, the faster your loan process will be.
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