1. Pay Down Debt
You need to have your debt under control before you purchase a home. There is a ratio called the Debt to Income Ratio. It basically calculates how much of your monthly income goes to paying debt.
If you have a high debt to income ratio, the bank will not lend you money.
A bank is a business that makes money off of the interest you pay. It has to be sure that the people it does business with will not default on the loans they give. Having a proper debt to income ratio helps show the bank you’re a viable business partner.
A proper debt to income ratio for home purchases is between 28-36%. The lower ratio is always better for securing a loan.
There are simple online calculators for figuring out what your debt to income ratio is like this one.
Paying down debt is a great way to financially prepare yourself for a home purchase.
2. Have A Steady Income of 2 Years
Most lenders like to see a steady stream of income.
If you are someone who bounces from job to job with varying degrees of income, banks will be wary of loaning you money. The steadier the job, means the steadier the income. The steady income then means the bank can anticipate payments from it’s borrower.
The bank is all about lending money, but only to people it feels it can trust to pay its loans back.
Having secure and consistent employment is one way to show the bank, you can count on me to repay my loan.
3. Get Pre-Approved
The real estate market is hot in 2022!
Homes are selling for above asking prices, waiving inspections and being sold sight unseen.
One way to help move in a quick market is being pre approved for a loan from a bank.
At the end of your pre-approval process the bank will award you a letter stating what amount you can “qualify” for. This makes your offers on homes more concrete.
The seller knows with a pre-approval letter that you have met their debt to income ratio, have a steady job and would be a good candidate to purchase the house.
4. Know What You Can Afford
After you are pre-approved, it is a good time to sit down with your finances and determine what price point you can actually afford.
Being approved for a mortgage payment of $1500 is one thing, but then if you add on PMI, homeowners insurance and property taxes (or your escrow), your monthly payment can be much higher than anticipated.
Understand the top and bottom range of what the housing prices that you can adequately afford.
You may even want to calculate a monthly maintenance fund, and electricity estimates to really understand what a potential property would cost.
This allows you to act fast when you find a home in your price range.
5. Save For the Cash Costs of Home Buying
While the bulk of your home will be financed through a bank, you will need some upfront cash to complete the deal. The costs include: earnest money, down payments, appraisals, inspections and closing costs. These costs are covered extensively in my blog post here.
Most of these costs are dependent on the price of the house with the exception of appraisals and inspections. These costs, you can find by googling local appraisal and inspection specialists.
Earnest money deposits, down payments and closing costs tend to differ according to property price, type of loan and negotiations. They can be different for every potential property you look at.
In the end, if you are not prepared with cash for these items, it can complicate your home purchase. You do need some cash to move forward with a home purchase including a VA loan (which doesn’t require a down payment).
Be prepared and make sure you have what you need.
Home buying is a fun process but can also be stressful. Taking the time to financially prepare for a home purchase will elevate a lot of stress and make it an enjoyable experience. It can also set you up for a home purchase that will bless you and your family.
As always, please note this is just some guidance. I am in no way a financial advisor. Please speak to a proper licensed financial representative before purchasing a home.