The process of buying a home can be one of the most exciting and terrifying times of life, all at once. This is especially true if you are buying a home for the first time and are fairly unfamiliar with the process. Home ownership gives you a greater sense of freedom and a wonderful investment for the future. At the same time, financing a home is a huge commitment, one that the mortgage companies take quite seriously — and unfortunately, one that many first-time buyers don’t quite comprehend. As a result, many prospective homebuyers wind up disappointed when their loan doesn’t go through because they didn’t get their finances in order before beginning the process.
To keep this from happening to you, we highly recommend taking whatever time is necessary to arrange your finances before looking for a home or applying for a mortgage. For most first-time buyers, this could take anywhere from a few months to a couple of years. The following guide should point you in the right direction.
Work on your credit
Establishing a good credit history is one of the most important things you can do to qualify for home ownership. If you do not have a credit history yet, you can begin building good credit by taking out a small credit card and paying the balance off each month. If you carry a lot of debt, or if you have negative marks on your credit, these can effect your ability to qualify — or at least to qualify for the lowest interest rates.
The law entitles you to a free copy of your credit report once every 12 months from each of the three reporting agencies (Equifax, Experian, and TransUnion), and you can obtain your free reports conveniently at this website. Pull your credit reports and look at them carefully. Then, do the following:
- Dispute any incorrect information, especially info that might be dragging down your credit score. Creditors have 30 days to verify this information. If they don’t, that information must be removed from your report.
- If you have negative marks from unpaid debts, work on settling the debt. The negative mark will stay on your report for up to seven years, but paying the debt shows good intent.
- If you have a lot of debt compared to your income (debt-to-income ratio), this can drag your credit score down, even if you’re current on your payments. Pay off some credit cards to boost your credit score quickly.
First-time homebuyers can qualify for an FHA loan with credit scores as low as 620, but generally speaking, the higher your score, the easier it will be to qualify and the better your interest rates will be – a score of 720 or above is a good target point. By taking some time to work on your credit, you’ll make the process much easier for yourself when it’s time to apply for a mortgage.
Establish a good work history
Lenders don’t just want to know you pay your bills on time, they also want to know if you have the money to pay. They’re not looking for huge amounts of wealth — just consistency. If your employment has been inconsistent over the past couple of years, it may be more difficult to qualify for a loan. Try to establish at least a two-year history with one employer, or at least show no lapse in paychecks over that time. If you are self-employed, try to document your revenue every month over a two-year period to show your income patterns.
Put some money in the bank
Conventional mortgages generally require a 20 percent down payment (for a $500,000 home, this would be $100,000). Sometimes these down payment requirements can be reduced if you take out private mortgage insurance, and FHA loans only require 3.5 percent down – but regardless, it’s a good idea to show a lender you have some money saved. A healthy savings account demonstrates not only that you can afford a down payment but also that you are prepared for the unexpected (for example, if you lost your job).
Getting your finances in order to buy a home may take some time and patience, but the long-term payoff is well worth it. When you are ready to look for a home in the Atlanta area, we are here to help! Call Atlanta Fine Homes Sotheby’s International Realty at 404.948.4812 to schedule an appointment.