Prepare your credit

Before you’re ready to buy a home, or even start hunting for the best mortgage rates, you need to take a look at your credit score. A low credit score can lead to higher rates, less desirable repayment terms, and possibly even a loan denial. The good news: a low credit score can be improved!

You should start thinking about your credit two years or so before you think you’ll be ready to apply for a mortgage. During this time (all the way until your mortgage loan is disbursed), you should focus on:

• Lowering existing debts, like balances on credit cards and student loans
• Making monthly payments on time, every single time
• Not opening any new accounts, such as credit cards or personal loans*
• Keeping older, existing accounts open, even if you don’t need them anymore
• Thoroughly checking your credit history for inaccuracies, and reporting them as such
• Regularly monitoring your credit reports for any suspicious activity

*There is a caveat here: if you have a limited credit history, you may actually need to open new accounts to get approved for a mortgage. Most conventional home loans require borrowers have three credit-based accounts open and active on their credit, but some FHA loans only require two. This includes credit cards, auto loans, personal and student loans, financed purchases, and other mortgages. You’ll want 12 to 24 months of active history on each account before applying for your mortgage.

Calculate what you can afford

Buying a home isn’t just about what you want; it’s about what you can afford to spend. And, your home expenses don’t just stop with your mortgage. There are many other expenses to consider.

Mortgage payments
You’re required to make monthly payments on your home loan. There are many different types of mortgages, and your interest rate will vary based on the repayment schedule you choose.

Property taxes
These will depend on the county you live in and the value of your home. The average family spent just over $2,200 in property taxes last year, according to the U.S. Census Bureau.

Homeowners insurance
When you own a home, it’s crucial to insure the property, structure, and even your belongings inside. Premiums vary, but the 2018 national average for homeowners insurance was about $1,100 a year.

Utility costs
You’re probably already paying utilities where you live, but a new or larger home can make them jump. If utilities are factored into your current rent, take that into account, too.

Maintenance
You should set aside about 1% of your home’s value for annual maintenance expenses. This covers everything from basic wear and tear to a new hot water heater.

Mortgage pre-qualification

Mortgage pre-qualification ensures you know how much money you’ll likely be approved for if you were to move forward with a mortgage. It involves providing a mortgage company with your full financial picture, but doesn’t include any commitment. Pre-qualification can also make you a more enticing buyer. Sellers know the process will move quickly if you’re already approved, which might encourage them to choose your offer over someone else’s. 

Before applying for a mortgage, make sure you take a look at your credit, do your research to determine what you can afford, and consider pre-qualification. This will make the homebuying process easier, and help you get a jump on finding your dream home!