Real Estate

Ways to Prepare Your Finances for Buying a Home

When you are getting prepared to purchase a home, it is important to take the time to look at your finances. This is a huge commitment and the bank will take a very close look at your debts, income, and spending to figure out whether they are going to offer you money for the mortgage or not.

Preparing your finances as early in advance can be one of the smartest things that you can do. Some of the ways that you can prepare your finances before you ever apply for the mortgage includes:

Look at Your Credit Score

Therefore, a good UK credit score is considered when buying a home. This is an important number that the bank will look at when determining whether to give you money or not. It can also determine the interest rate that you will pay for the mortgage as well. The difference between a 659 credit score and a 760 one could be 1% in interest, which will add up. 

Take the time to look over the credit report and see if there are ways that you can lower your debt and get your credit up more. Having a mixture of credit accounts, avoiding opening new credit accounts, paying your bills on time, and paying down some of your credit card bills and We have to take note that a good UK credit score is considered when buying a home.

Look at Lower Down Payment Options

Gone are the days when potential homebuyers are expected to come up with the 20% down that they needed to do in the past. With rising house prices, it can seem almost impossible to get that much in order to help you get a home. The good news is that there are a lot of different options when it comes to down payments for a homebuyer. 

You should explore some of these options to help you out. There are some available as low as 3% down and many options in between including 5% and 10%. For some first time homebuyers, there are programs in place that allow them to put nothing down and get a home, but these are harder to get and have a bunch of requirements that must be met. 

While a 20% down payment will provide you with the best rates and can make the mortgage process easier than ever, it is just not doable for most. Choosing to go with a lower down payment and checking out the rates for the amount you are comfortable with can be a better option. 

Measure the Debt to Income Ratio

While the credit score is an important number to look at when you want to convince the bank to give you money, you also need to look at your debt to income level. If your debt is eating up too much of your income, the bank will be nervous about giving you more money. 

Your debt to income ratio needs to be at 43% or lower. The lower this number goes, the more home you can afford. While some lenders will allow it to go higher than that, you will need to have high cash reserves or another compensating factor in place. 

The reason for this ratio being used is that it helps make sure that you can pay the mortgage. If you have to pay off too many debts and a really high mortgage, then you may run into some trouble along the way. 

You can figure out this ratio on your own. You just need to add up all of your current debt payments each month and the proposed monthly mortgage (including the home insurance and taxes). Take that number and divide it by your gross monthly income. If the number is higher than 43%, then it is time for you to start paying off some debt before you look at homes. 

Know What Lenders are Looking For

When you are ready to apply for a home loan, a bank is going to assess whether you will be able to pay them back for the amount that you owe. They will check to see whether you have a steady income and can look at the amount you have available for a down payment. 

You will quickly notice that there will be a lot of background checks into your finances when you want to get a new mortgage. They will also take a look at your credit to see whether you have a good history of paying off your debts before they hand over the large amount of money. 

Some of the things that you can expect the banks to look at, and that you should get in order before applying, include:

  1.     FICO credit scores and your credit history
  2.     The amount that you want to use for your down payment and where the funds come from. 
  3.     List of all your assets including retirement accounts, stocks, and real estate. 
  4.     Employment history and income
  5.     Tax returns
  6.     Bank statements for at least three months. 
  7.     The loan amount that you want along with the value of the home in question
  8.     If you have been renting rather than owning your home, the bank will want a rental history from you
  9.     Your debt to income ratio

To help you get the best home loan and great terms, start saving money ahead of time to help. This will make it more likely that you will get a good loan and can show the bank that you are serious about your finances. 

Getting Ready to Purchase Your New Home

Waiting until the last minute to focus on your finances when you wish to purchase a new home can be a bad idea. You will have a mess and may not be able to impress the bank the way that you want. By following some of the steps above, you will be able to get your finances in order and have the best chance at getting that mortgage. 

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