How to Get Your Finances in Order Before You Start House Hunting

If you’re looking to buy a home in the Mid-Missouri region, the sooner you begin to prepare, the easier the process will be. The primary key to this is planning your finances in advance. In other words, allow yourself time to build credit, pay down debt, and save as much money as you can for the down payment or other homeownership expenses. Getting your finances in order before you start house hunting may help secure a higher budget and qualify you for lower interest rates on your home loan. Today, we’re going to share our top tips for preparing your finances before beginning a home search.

#1 Conduct a Credit Check

The first thing you should do is get an idea of where your credit score is currently at. In general, the better your credit score, the more it will help to secure lower interest rates, increase your buying power, and decrease the amount you pay on your mortgage over time. Moreover, most lenders require a minimum credit score, so if you’re on the lower end, the best first step is to speak with a lender about the requirements and see what steps you can take to increase your score high enough to ensure your loan will be approved.

#2 Calculate Your Debt-to-Income (DTI) Ratio

One of the most important numbers the lender will use to decide if you qualify for a mortgage is your debt-to-income (DTI) ratio. It’s a key indicator of your overall financial health that compares how much money you owe each month to the amount you earn. Here’s how to calculate your DTI:

Step 1: Add up all of your monthly bills, including house/rent payments, alimony or child support, credit card payments, loans, and other debts. In terms of home loan approval, general monthly expenses such as groceries, gas, and utilities are not included in the figure. Still, when setting an overall budget, you should keep those totals in mind.

Step 2: Divide the total number that you calculated in step one by your gross (pre-tax) monthly income. Once you calculate these numbers, the result is in the form of a percentage, and that serves as your DTI ratio. Typically, the lower the number, the lower the risk you’re viewed as by the lender. The required number can vary by mortgage company, so it’s best to ask your lender what they need in terms of a debt-to-income ratio.

#3 Set Aside Money for Your Down Payment

Most home loans require at least some amount of down payment. Generally, the amount of money you’re required to put down on a home loan is between 5 and 20 percent of the purchase amount, but it can vary depending on your loan type. Your lender can help you determine how much of a down payment you’ll likely need. The best thing you can do is begin saving extra money well in advance.

#4 Determine Your Household Budget

The last step is sitting down and writing out your monthly expenses and income without leaving anything out! And just because you may get approved for a certain amount doesn’t mean you’re going to be comfortable spending that much monthly. You should write down every detail of your personal finances and decide just how much you’re comfortable spending on your new home each month. If you do not currently rent or own your own property, ensure that you factor in new household expenses, including household supplies, utilities, etc.

Closing Thoughts

Regardless if you’re buying your first home or you’ve bought many houses before, preparing financially is a crucial part of beginning the home-buying process.

One of the best places to start, even if you’re not quite ready to buy, is developing a good relationship with a local real estate professional. This person can guide you through the process, even before you start to look for properties.

Our Mid-Missouri real estate experts have assisted countless home buyers. We are happy to guide you through the entire process, from planning your finances and recommending a reputable lender to closing day and beyond. If you have questions about how to start preparing to buy a new home, contact us or fill out the form below and one of our friendly pros will be in touch soon!