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Financially Preparing to Buy Your First Home

Tips to Buy First HomeOne of the most exciting moments in many people’s lives comes when they purchase their first home. It should never be an impulsive decision, though, but one that you’ve put a great deal of thought and planning into… especially when it comes to the financial side of things. Whether you’re approved for the ‘perfect’ home or something less than you were dreaming of depends largely on how well you set the stage before you fill out the application. Responsibly managing your finances will be the ultimate key to your approval.

Mortgage lenders take a great deal of risk every time they approve thousands, and even hundreds of thousands of dollars for a home loan. The status of your credit, the stability of your job and the amount of income you earn, all go into their decision to approve or deny your mortgage application. This is the reason that all aspects of your finances need to be in order BEFORE you even apply. Here some tips to help you demonstrate your trustworthiness to lenders who will finance your first home.

Responsibly Handling Your Credit

You want lenders to see you as a low-risk borrower. To that end, it is imperative that your credit history is in good shape.

You can begin to see where you might stand with lenders by reviewing your credit scores. To be approved for the largest amount at the best rate, your score needs to be above 720 – the higher the better. If you fall below that number, you may still be approved, but it may be for less than what you need. Also, review your credit reports thoroughly to be certain that all the details are accurate. It would be a shame to have a low score because false information is keeping it down.

The way to raise your score to a more acceptable level may seem counter-intuitive. It requires you to use credit responsibly more often – choose one credit card that you will use regularly and pay off the entire balance each month. The point is to demonstrate your ability to borrow and pay back without adding more debt to your already delicate situation. Over time you will see your score slowly improve.

One slip up in missing or making a late payment won’t mean the end to your dream house. However, if you habitually pay late or miss payments, now is probably not a good time to seek a mortgage. This a red flags to lenders that you would be a high risk and a potential for default. Take corrective action now to slowly change their negative perspective by your actions. Demonstrate that you take your obligations seriously by paying more than the minimum and always on time.

Reducing Your Amount of Debt

Lenders will calculate your debt-to-income (DTI) ratio, which is essentially the percentage of your monthly income that is eaten up by debt repayment, to help determine your eligibility for a loan. A DTI above 40 percent will most likely mean you will be automatically denied a mortgage application with no questions asked.

The more debt you carry the higher your DTI will be, meaning that more of your income is unavailable to pay back the mortgage and lowering your chances of being approved for the money you need to buy a new home. To lower your DTI and at the same time build your credit score, you will need to stop using credit cards, begin paying off larger chunks of your credit card and loan balances, and avoid opening new accounts.

Consistency Is Key

No matter what your long term goals may be, financial, athletic, relational, etc., consistency and perseverance are the keys to success in all aspects of life. Fluctuations in income, and expenses, reflect poorly on your reputation when trying to buy your first home. While it’s important to be flexible and adapt, lenders will frown upon habits that reflect an unpredictable, careless attitude.

The closer you get to living a predictable financial life the better. Maintaining a stable employment history of at least two years, paying all of your bills on time and keeping your debt to a minimum will go a long way in convincing lenders that you’re trustworthy. Afterall, you’ll be signing an agreement for up to 30 years!

Cash for a Down Payment

The old adage that cash is king is still relevant in today’s chaotic economic market. Be prepared to pony up 20% for a down payment. The more equity you can start with, the less risk there is for the lender. A higher down payment serves to both lower the premium on the mortgage and sends a positive message to lenders that you are able to save for a rainy day, and therefore more likely to pay your mortgage payment.

In addition, you will avoid having to purchase a private mortgage insurance policy (on top your standard homeowners’ insurance), which is required by lenders if you put down less than 20 percent. Of course, you don’t want to invest more up front than you can reasonably afford, and you definitely don’t want to sink all of your available savings into purchasing your first new home. Save some for an emergency!

Practical vs. Extravagant Dreams

Buying a new home is a long-term proposition that requires a practical, realistic vision of the future. The house of your dreams could easily end up being more than you bargained for, if you put everything else on the back burner. Don’t bite off more than you can chew only to discover life is more struggle than the house is worth. Don’t let your imagination take over the wisdom of living within your means.

Think of it as a step forward toward your end goal. If your income rises and you can move another step closer in a few years, awesome, but if not, know that you made a responsible decision that benefited your family for years to come.

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