5 Things You Need To Consider Before You Finance a Home
When you’re looking to finance a new home, the process can seem complex and daunting. After all, numerous things factor into whether or not you’ll get approved for a loan. We’ve put together a quick list of the five things to consider before you finance a home so that you can feel prepared through each step of the process.
Look into Your Credit
Some of the first things you need to consider before you finance a home are your credit score and payment history. Before you even come close to financing the house of your dreams, lenders will scour your credit history for timely payments and overall responsible spending. Your credit and payment history are significant players in your ability to snag financing for your home. If they’re not in great standing, you’ll want to take some time to improve your credit score and payment history.
Understand Your Debt-to-Income Ratio
Financing a home often comes with the implication of taking on new debt. Because of this, acknowledging your debt-to-income ratio is essential. This ratio outlines how much debt you have left to pay and stacks it against your monthly income. Depending on where your balance lies, lenders will either reject or approve your application. Therefore, it’s worth looking into what your ratio is before you start the application process.
Prepare for Down Payments and Closing Costs
Of course, once you land a loan, you’ll need to ensure you have some money stashed away for the down payment and closing costs. Most lenders will require that you put down at least five percent of what the home is worth before proceeding. So, once you determine which price range suits you best, you can start to save for these expenses. Additionally, you’ll also need to put aside a nest egg for closing costs, which can range from 2 to 5% of a home’s total value.
Know What Your Monthly Payment Will Be
Once you have a better grasp of your credit and initial fees, you must understand your mortgage and how much it will cost you monthly. Be aware that your mortgage payment often comes attached to extra expenses such as real estate taxes and homeowner’s insurance, so be prepared to pay a little extra. Knowing how much your monthly bill will be will help you build your budget, ensuring your finances stay intact.
Build a Comprehensive Budget
Once you have a solid grip on your financial needs and monthly expenses, it’s essential to determine a budget for your prospective home. Square away some cash for closing costs and down payments, figure out how much you’ll be spending on your mortgage and other expenses, and determine how much you’ll have left over each month. Creating a comprehensive budget before you buy can ensure you can make your mortgage payments and pay the rest of your expenses fully and on time.
The process of financing a home can feel overwhelming. But taking a little time to understand the primary facets of home financing can help you know what to expect.