Many homebuyers are financially unprepared to purchase a home. According to a recent National Foundation for Credit Counseling survey, about half of respondents report being "least prepared" to buy a home. It indicates that education is needed, especially for first-time home buyers.

Here's how to prepare finances before searching for a home:

1. Make a Financial Plan – Knowing where to start means conducting a complete review of how your household budget is managed. Comparing income and expenses, reviewing debt, and tracking savings are just a few ways to measure homeownership readiness.

2. Review Your Credit Report and Score – A mortgage is typically the most significant debt a person will likely carry in their lifetime. Credit history plays a huge part in obtaining a loan and getting a satisfactory interest rate from a lender. A credit report may be accepted without a score for free once every 12 months from each of the three bureaus by visiting AnnualCreditReport.com. Review the credit report for discrepancies and dispute any differences. This should be done at least six months before applying for a loan, allowing inaccuracies to be corrected. A score and a free credit report can be purchased for a small fee. This score is critical to mortgage approval and for a competitive interest rate. It's worth looking at the score before applying for a loan. Lender guidelines vary, but a FICO score 760 is typically the threshold for the most favorable interest rates. 

3. Start Saving – A down payment is typically no less than 20 percent of the purchase price of a home, especially to avoid having to pay private mortgage insurance. Any down payment (with a mortgage) of less than 20% down will require private mortgage insurance (PMI). This alone can disqualify many borrowers. If the borrower pays 20% or more at closing, it will also increase the chance of having more favorable mortgage terms.

4. Decide the Loan Type – After selecting a lender, decide whether to take on a fixed-rate or adjustable-rate loan. For those planning to remain in the home for a long time, a fixed-rate mortgage helps add stability by keeping the payment the same for the life of the loan. Those expecting to stay in the home no longer than five to seven years may be better off getting an adjustable rate loan, where typically, they could benefit from lower rates in the short term.

5. Get Pre-Approved for a Loan – Applying for a mortgage typically involves a cost and is done by supplying detailed financial documentation to the lender. The lender will use this information with information obtained by pulling a credit report to determine the amount and terms available to the borrower. This is not a final loan approval but a significant step toward that outcome.

6. Lock in the Rate – If you like the interest rate offered when pre-approved, lock it in by getting the commitment in writing. Finding a home, negotiating a price, and securing funding can take time. Locking a rate for a reasonable period helps make room to complete the process without risking a less favorable interest rate.

 

For more information, contact Treasure Coast Insider Blogger Mona Leonard at 772-530-6131 or mona@monaleonard.com.