In the process of getting ready to buy, it is very important to do some soul searching to determine what you are looking for in a home, if renting or owning is better for you, and the time frame you intend to live in your house.
For many of us, what we are looking for in a home is largely determined by our budget. Or, maybe for all of us 😉 Yes, I’d love a brand new home with walk in closets in the nicest area in Colorado, but that isn’t realistic for me, it’s not in my budget.
A key factor in determining if you will qualify for a loan, and how much money you can borrow is your credit. Here are three important steps to optimizing your credit for your pending home purchase based on tips from lenders and Fannie Mae.
- 1. Get your credit report and clean it up.
We’ve all heard the catchy free credit report commercials, but when was the last time you got your credit report? Remember, you are entitled to a free report once a year. Your lender will look at your credit history because they want to know if you consistently pay your bills on time.
Once you have obtained your report- take the time to pay off any negative marks, or resolve any errors on your report. Your lender will look at your report, and it will affect your rate.
Fannie Mae recommends that if your score is below a 620, put the home purchase on hold until you can earn a better score. But, there are many home buying programs to help out with lower credit home financing.
1) Pay off your debts.
Another thing that lenders will analyze is your total debt, things like car payments, credit cards, student loans, and so on. The amount of debt compared to your income determines how much a lender will loan you, and whether or not you will be approved. In general, monthly debt and monthly housing expenses should not be more than 36% of your gross monthly income (income before taxes).
If you can reduce other debts, this will free up room in your budget for a new monthly payment. Also, it could help you get qualified for a larger loan.
2) Don’t go on a shopping spree.
Once you have decided to purchase a home, you need to be careful about large purchases you make. First of all, you may want to save as much as you can toward the down payment, closing costs, moving costs, and repairs. Also, taking on additional debt (especially after signing the contract) can mean losing your loan… and your home… before closing! Once you have been approved, you don’t want to make any significant changes, like switching jobs, buying a car, and so on, before closing date.