Planning a home purchase isn’t something that you should just jump into without some careful planning. It pays to get yourself in the best financial position before you do anything as this can potentially make or break your plans. Here are some tips for planning your house purchase from a financial point-of-view.
Look at your credit score
Lenders will use your credit score and credit history to work out how much of a risk it may be to approve you for a mortgage so you can help your cause by making sure that your credit report is in order. If you’ve got a history of being late with payments or missing them altogether, you’ve got a definite red flag against you as far as lenders are concerned. Look at it from their perspective: you’re asking them to lend you a large amount of money so they’re going to want to know that you’re a safe bet and don’t have a history of getting behind with payments or running up lots of debt. If your credit score is poor, expect to be saddled with unfavorable interest rates or in some cases, your application may be refused altogether.
First of all, you need to know what your credit score is so that you can assess the potential impact on your ability to get a mortgage. There are three major reporting agencies: Experian, Equifax and TransUnion. Each one has a different method for calculating credit scores so it’s advisable to get a copy from all three. This isn’t free but it’s well worth doing, especially if you find that your credit score is being dragged down by errors. This can be easily corrected by contacting the relevant reporting agency and notifying them of the error, although it may take several months for the mistake to be rectified. If your score isn’t all it could be, making payments on time with no defaults is one of the best things that you can do to improve it.
Don’t overstretch yourself
Ask yourself, how much can you borrow? You’re typically advised to arrange a mortgage that is two and a half times larger than your yearly salary but this won’t be a realistic proposition for everyone as your income, debts and outgoings will have a big impact on what you can realistically afford to take on in terms of mortgage repayments. If this is the case for you, be prepared to settle for borrowing a lesser amount so that there’s less chance of biting off more than you can chew. Another common piece of advice focuses on ensuring that your house-related payments don’t account for any more than 36% of your monthly income.
There are various mortgage calculators that can help you to decide how much you should borrow but for a more personal and accurate gauge, you may be better off consulting a professional who can advise. One option is to look into being pre-approved by a lender. This will take into account your financial situation and suggest the most sensible course of action based on this.
Making a down payment
If you don’t want to be paying off a large mortgage, you can reduce the burden by making a bigger down payment instead. It’s common for lenders to request a down payment of 20% of the asking price and although it is possible to secure a mortgage with a lesser down payment, you will probably be required to pay a bit extra for mortgage insurance so that the lender can cover themselves if you default on the repayments. Remember, however much you plan to put forward as a down payment, don’t forget to factor in fees (such as closing costs), which can be more expensive than you might think.
Buying a house is a serious decision and it should not be taken lightly or rushed in to. Take the time to do the research and get yourself in the best financial position possible before signing on the dotted line.