How to Financially Prepare for Buying a House

When it comes to buying a house there is no getting around it – you are going to have to have your finances and paperwork in order.

Unless you are in the fortunate position to be making an all-cash offer, it is likely you will need a mortgage.

And with the market so hot right now, sellers are not going to wait around for you to get approval -so it makes sense to have all your financing in place to let you move quickly when you find the right home for you.

With so many mortgages and lenders to choose from, everyone’s financing journey will be a little different but there are some generally common steps to follow.

First off is the down payment – lenders will expect you to put some money on the table but how much will depend on the type of mortgage you go for. It can be as low as 3.5 percent for an FHA mortgage, but other products may want as much as a 20 percent minimum – especially if you want to avoid paying for Private Mortgage Insurance – a policy that pays the bank if you do not. Of course, the more you put down the less you need to borrow and the lower the repayments will be.

Next will be to choose a lender – and it pays to shop around. There are traditional banks, credit unions, community banks, and online lenders, each often having multiple types of mortgages. They each set their own interest rates, lengths of mortgage, and other terms and conditions on whether your rate is fixed, floating, or open to review. Ask lots of questions and compare lenders – your mortgage payment is likely to be your largest monthly expense, so it is highly important. Use a mortgage calculator to help figure things out.

Your credit score is going to play a big factor in what mortgage and rate you are going to get. Banks are unwilling to lend to people with no or low credit scores and will put more conditions or higher rates in place for people with less-than-ideal scores. Know your score and do what you can to improve it – avoid being late on payments, do not have too much in borrowings on store and credit cards and do not have too much-unused credit available. There are exceptions but 620 seems to be a floor for many financial institutions.

Following your credit score is your debt-to-income ratio. Banks will want to know how much debt you are already committed to paying out each month and they factor it against your income. The lower your ratio the better position you are in to get a good mortgage offer, but rules dictate the banks cannot lend to you if it is above 43 percent, so pay down debt or increase your income. Absolutely do not take out new lines of borrowing while applying for a mortgage.

Your lender is not going to just take your word for your income and financial situation – so good documentation is required. Ask your lender for a full list of information they will require evidence for which is likely to include pay stubs, W2s, tax returns, bank statements, and proof of employment. Prepare a solid file and fill in any gaps in records you may have.

Finally, once your mortgage is in place and you are in a position to make serious offers on your next house, remember closing costs – there is a myriad of fees that need to be settled before the deal can be completed and the mortgage put into effect. These include application fees, closing fees, title insurance fees, credit report fees, recording fees, underwriting fees, escrow fees, and survey fees among others. Work with your lender and realtor to have a good understanding of what you will need in cash to meet these costs which can be between two and five percent of the house price.