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Getting Your Finances Ready for a Home Purchase

Preparing for a mortgage can be a stressful process. The lender wants to see that you have a solid credit history, a low amount of debt, a stable employment history, and enough income to afford the monthly payment on the mortgage you’re looking for.

In the months leading up to a home purchase, you’ll be preparing for the mortgage application. It’s wise to focus on your whole financial picture, not just to qualify for a mortgage, but also to put yourself in the best position once the sale is complete.

Build up an emergency fund. Having an emergency fund is solid advice for any financial situation. When you’re getting ready to buy a home, an emergency fund is even more important. Work toward saving several months of mortgage payments that you can use during a short-term income loss like job loss or disability. Just remember what the emergency fund is for and avoid the temptation to spend from it for other, more frivolous reasons.

Know how much you have and how much you owe. It’s important to have a good understanding of your financial picture. Take inventory of all your deposit, savings, investment, and debt accounts. Create a list of each all the accounts and their respective balances. Then, store the list with your other important documents. Update it periodically and you’ll always be able to easily tell how much money you have and where it’s located.

Pay down some debt. Your mortgage lender will compare your monthly debt payments to your monthly income to decide whether you can comfortably afford a mortgage. Generally, spending 10% or less of your income on non-mortgage debt is preferable. Besides making it easier to qualify for a mortgage, reducing your debt also makes it easier to make your mortgage payments. And, the less money you spend on debt, the more you can put toward savings, whether it’s your emergency fund, retirement, home improvements, or a vacation.

Catch up on everything. You don’t want to have any lingering loose ends as you go through the home buying process, or afterwards for that matter. Clear up past delinquencies, whether they’re on your credit report or not. Once the home sale is complete, you can focus on getting used to having a mortgage not worry about dodging bill collectors.

Paying off delinquencies listed on your credit report is a given; you won’t qualify for a mortgage without doing it.

Create a mock budget for your post-home purchase finances. It will give you an idea of what your spending and finances will be once the sale is complete. You may not know for certain what your monthly mortgage payment will be, but you can probably get a good estimate using an online calculator. Use the budget to help decide what your spending in other areas – food, transportation, clothing, etc. – would have to be for you to comfortably make the mortgage payment each month.

Rein in excess spending. You’ll have to get your spending under control if you want to save up a good down payment and build up a good emergency fund. While your current spending may not be problematic, cutting back probably can’t hurt. It will help you reach your savings goals faster.

Having your finances under control certainly help you in the mortgage process. But it will make life much easier once you’ve bought the home. You’ll be thankful you went the extra mile to ensure financial stability.
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Wednesday, 15 July 2020

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