Buying a house is usually an exciting experience but also a daunting one for first-timers. The most stressful part is often the financial preparation needed for this big expense, but armed with the right information, you should do perfectly fine.
Applying for a Mortgage
The last surprise you’ll want is knowing you’re not financially qualified to buy the dream home you just found. Avoiding this scenario means having good credit, cash for closing, and a confirmable income.
Examining Credit Reports
It’s no surprise (hopefully) – to get a mortgage, you need a decent credit score. Start checking your credit reports for errors and may consider paying a daily credit score monitoring service for this.
If you want to improve your credit score quickly, stop using your cards two months before applying for a mortgage and pay down your current balances. As well, you should avoid getting new credit until after closing on your new house.
If you’re purchasing the property with a co-buyer (for example, your spouse), your credit score as well as that co-buyer’s will be considered by your mortgage lender. Even if the other buyer’s score is stellar though, don’t assume that things will go perfectly from there. Finally, take note that it takes at least six months for your credit score to show some significant improvement, so it’s best get started as early as you can.
Saving Cash for a Down Payment
Aside from ensuring that your credit score is looking great, you’ll also want to plan for the money you’ll need to make a deposit. This is usually some 3.5% to 20% of the purchase price. While saving up for your deposit, resist the temptation to invest in the volatile stock market with cash that you intend to use within a year or two.
The thought of earning a bigger return on your cash than a regular savings accounts can offer, is indeed tempting. At the same time, you wouldn’t want to risk not having the funds to pay for a house when you’re ready to buy one. While you save, don’t underestimate the amount of cash you might need.
Getting Documentation in Order
Of course, in the end, it’s all about the documentation. You can’t purchase a house – at least not within the protection of the law – without all those papers. Besides, there’s no way you can get a mortgage if you can’t prove that you have enough income to pay off the loan. So don’t delay and start gathering those w-2s, bank statements, payslips, etc., as well as copies of your tax returns in the last two years if you’re freelancing or self-employed.