Six Things You Need to Do If You Want to Buy a House Next Year – Part 1

Are you looking to become a homeowner sometime next year? Congratulations! This is a really big step, especially if this will be your first home. If you are like the vast majority of Americans, then you don’t have a couple hundred thousand dollars lying around in your savings account. That means you’ll need to convince a lender to approve you for a mortgage loan. This is no simple matter.

A mortgage loan represents a lot of money, and lenders will want to make sure you are a good bet before agreeing to lend to you. The state of your financial life will affect the amount a lender agrees to give you (i.e. how much house you can buy), your interest rate (which affects your mortgage payments), and whether you get approved for a loan in the first place. Even if your financial record isn’t spotless, you still have time to improve it.

In this two-part series, we’ll look at six things you need to start doing right now to improve your mortgage prospects.

1. Check Your Credit Report

One of the biggest factors lenders take into consideration when determining your worthiness of a mortgage loan is your credit report. Your credit report will tell them things like:

  • How much debt you have
  • How much credit you have available
  • Whether you’ve missed loan and credit card payments in the past
  • Your financial history

All this will be rolled into a credit score. There is no specific score you have to meet in order to qualify for a loan, but current wisdom suggests you’ll need a minimum score of 580 to receive an FHC loan and a score of 620 to get a loan from lending giants Fannie Mae or Freddie Mac. Ideally, you want to try to inch your credit score up to 700, considered “good” in order to get a lower interest rate.

Start by checking your credit report to see what your score is. Many banks allow their customers to pull their credit reports, but you can also pull your report once a year for free at AnnualCreditReport.com.

Pull your credit report at least a year before you request pre-approval on a mortgage loan and check your score. If you’re in the 700s, keep doing what you’re doing or see if you can increase it more. If it’s under 700, then make a commitment to improve it.

Carefully review your credit report for potential errors. Unfortunately, credit report errors are very common. If a creditor reported an incorrect late payment on your report, it could lower your score and make it harder for you to get a mortgage. You’ll want to catch errors early so you have time to fix them.

2. Pay Your Bills on Time

You should be doing this anyway, but if you needed one more reason to make all your loan, rent, credit card, and utility payments on time, know that it will help you get a mortgage. If you miss a payment or even make a late payment, the creditor could report this to the credit reporting agencies, which will lower your credit score. A lower credit score means a higher interest rate or even the possibility your mortgage loan request will be denied.

3. Pay Down Your Debt

When a lender decides how much they are willing to lend to you, one of the primary factors they take into consideration is your debt-to-income ratio. That means how much debt you currently carry versus how much you earn. The higher your debt to income, the less money your lender will approve for the loan. High debt could make the difference between being able to afford your dream home and getting stuck in a tiny, one-bedroom condo in the bad part of town.

In the year before you buy your home, work hard to pay off lingering credit card debt. Also, consider increasing payments on your car loan and student loans.

You Can Do It!

This all probably seems like a lot of work (and we’re only halfway done with this series), but that’s why it’s so important to start on these steps early. If you begin paying down your debt a little each month, it will make a big difference by this time next year.

When you’re ready, go ahead and jump to the second half of this article series to learn more about how you can show more income to decrease your debt-to-income ratio.

In the meantime, one great way to kickstart your efforts at personal financial reform is to get support and help from your friends and family. Consider creating a Money Club with your gal pals so you all can meet your money goals together.

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