How to Prepare Financially for a Mortgage

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Although buying a home is a huge financial achievement, you may feel like you have to learn a lot to navigate the process, especially when it comes to preparing your finances.

Below, Select breaks down some steps you can take to ensure you’re as prepared as possible for the home buying process.

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Make sure your credit score and credit report are in good shape

Your credit score is one of the most important factors related to your financial health since lenders use it, along with your credit report, to determine the interest rates you will qualify for when applying for a line of credit. or a loan.

Interest rates can make borrowing even more expensive. The higher the rate, the more expensive it will be to take out this loan or line of credit. The same idea also rings true for mortgages.

Keep in mind that some mortgage lenders cater to borrowers with lower credit scores. When you apply for a new line of credit or a loan with a lower credit score, you’ll likely end up receiving a higher interest rate because the lender will view you as a higher risk.

Conversely, having a higher credit score usually translates to a lower interest rate, which makes borrowing money more affordable. It is therefore in your interest to work on improving your credit score before submitting a mortgage application. Continuing to pay your bills on time is the single most important thing you can do to boost your credit score.

As for your credit report, check it for any inaccuracies that could lower your credit score and increase your debt-to-equity ratio and make sure everything looks correct. Lenders will want to make sure your total debt doesn’t significantly exceed what you can afford to handle before they give you a mortgage. Credit monitoring products like Experian (free) and IdentityForce® (paid) can help monitor your credit report for inaccuracies, potential fraud, and identity theft.

Pay off any existing debt

Your debt-to-equity ratio will certainly be considered when applying for a home loan, as lenders use it to determine whether or not you can afford to buy a home. Typically, your debt-to-equity ratio cannot exceed 43% to qualify for a home purchase – and the lower the ratio, the better.

One of the main ways to lower your debt-to-income ratio is to pay off any existing debt, including any student loan debt, credit card debt, personal loan, or other line of credit you may have.

The debt snowball method is a popular strategy for paying off debt faster and involves eliminating the smallest debt balance first while only paying the minimum on all your other debts. Seeing the smaller balances disappear first helps keep you motivated, allowing you to progress to larger amounts until you are completely debt free.

Another strategy, the debt avalanche method, involves eliminating your highest-interest debt first while making minimum payments on others and working your way up to debt with the lowest interest rate. lowest interest. This method will actually help you save the most money on interest charges.

Make sure you have an emergency fund

Unforeseen expenses are inevitable as soon as you close in on your home – the boiler needs replacing, the roof suddenly leaks, or the floorboards start to look like they’ve seen better days.

That’s why it’s not enough to save enough money to cover your down payment and closing costs when you buy a home. It is important to be prepared to cover any unexpected expenses as soon as possible. Having an emergency fund — a reserve of cash you can access in times of need — can help offset those unexpected costs.

Emergency savings can also help you continue to pay your mortgage payments in case you are laid off after buying your home.

It’s a good idea to keep your emergency fund in a relatively accessible account, such as a Marcus by Goldman Sachs High Yield Online Savings Account or an Ally Online Savings Account. With these high-yield savings accounts, you’ll receive monthly interest just for maintaining a balance, which will help your emergency fund grow a little faster.

Experts generally recommend that you have an emergency fund of around three to six months worth of living expenses, although how much you should save really depends on your personal circumstances and how much you spend monthly.

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a member of the FDIC.

  • Annual Percentage Yield (APY)

  • The minimum balance

    None to open; $1 to earn interest

  • Monthly fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *Cycle withdrawal limit of 6/instructions is waived during the Coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a current account?

  • Offer an ATM card?

Ally Bank Online Savings Account

Ally Bank is a member of the FDIC.

  • Annual Percentage Yield (APY)

  • The minimum balance

  • Monthly fee

    No monthly maintenance fees

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *Cycle withdrawal limit of 6/instructions is waived during the Coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a current account?

  • Offer an ATM card?

    Yes, if you have an Ally current account

Know your budget

It’s important to know how much you can actually afford to spend on a new home. Getting pre-approved for a mortgage can help you get a clearer picture of how much loan you’ll qualify for and what your monthly payments might look like.

That said, keep in mind that this estimate doesn’t take into account other financial obligations you have, such as financial support for your family or other monthly payments that don’t show up on your credit report.

For this reason, you should consider how much of a monthly mortgage payment you can comfortably afford. It can also be a good time to re-evaluate your monthly expenses and figure out which ones no longer serve you and which ones you can afford to cut a little.

To estimate how much you can afford to spend on a new home, work with a financial planner or real estate agent to dig deeper and see what a realistic budget would look like.

Save enough for a down payment, closing costs and fees

The down payment, part of the home’s value, is one of the biggest upfront costs you will have when buying a home. It can be as low as 0% if you qualify for a VA loan or 3.5% if you apply for an FHA loan. Keep in mind that most conventional loans require a down payment of 5% to 20% of the value of the home.

That said, some lenders offer special loan options, like Chase Bank’s DreaMaker loan, which requires just a 3% down payment.

hunting bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a DreaMaker℠ loan

Closing costs are another set of expenses you’ll need to be prepared to pay when buying your home and can add up to around 2% to 5% of the loan amount to your final price. They also include appraisal fees, underwriting fees, home inspection fees, credit check fees, and title insurance and title search fees, among other fees.

Fees are unavoidable when buying a home, but it can be helpful to apply for a mortgage from a lender that reduces or waives them. Ally Bank, for example, will not charge an application fee, origination fee, processing fee or underwriting fee.

If not, be prepared to cover these costs so you don’t rush out at the last minute for additional savings.

Allied bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, HomeReady Loan and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a HomeReady loan

Advantages

  • The Ally HomeReady loan allows a down payment of just under 3%
  • Pre-approval in just three minutes
  • Submission of the application in less than 15 minutes
  • Online support available
  • Existing Ally customers are eligible for a discount that applies to closing costs
  • Does not charge lender fees

The inconvenients

  • Does not offer FHA, USDA, VA or HELOCs loans
  • Mortgages are not available in Hawaii, Nevada, New Hampshire or New York

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.