Home Buying

Prep Your Money and Your Mindset for Homeownership

by Megan Nye November 19, 2018

Ready to leave the renting life behind, but find the prospect of buying a first home a bit daunting?

Your concern is perfectly normal. A home is, after all, likely one of the largest purchase you’ll ever make, and the process can be complicated at times.

But it’s important not to let pre-purchase jitters hold you back from becoming the master of your own castle. If you do your research, get organized and seek the right expertise, your journey from renter to equity-building homeowner can be smoother, less stressful and even joyful. 

Take stock of your finances
 

To map out a path to where you want to be, you have to know where you stand currently. Evaluating the full picture of your finances can help you throughout the process — from home shopping through closing.

Start by asking yourself the following:

  • How much home can I comfortably afford? Your monthly housing costs likely consist of loan payments, property taxes, homeowner’s insurance and possibly homeowners association fees for community upkeep. A mortgage affordability calculator can help you estimate your target purchase range.
  • Am I a good candidate for a home loan? Lenders typically look for a debt-to-income ratio of no more than 43%, including your mortgage. However, there may be a difference between how much a bank will lend you and what you can actually afford. 
  • How much are closing costs and the down payment? Ideally, you’ll have 20% of the purchase price to put down — the amount necessary to avoid private mortgage insurance, which increases your mortgage payment — as well as an additional 2% to 5% of the purchase price for closing costs. However, lower down payment options may be available, depending on your situation.
  • Am I prepared to cover the “hidden” costs of homeownership? Your mortgage is just the beginning of what you'll spend on your new home. Remember that other common expenses, such as appliance repairs, painting and mechanical upgrades may be in your future.

Polish your credit score
 

Your credit score carries plenty of weight in your mortgage application. If subpar credit can knock you out of the running for some loans, a high score can help roll out the red carpet for the best mortgage terms.

Here’s how to spiff up your score as much as possible before submitting your loan application:

  • See where you stand. Order your credit score online or check to see if it’s printed on your monthly credit card bill. A score of 700 is “good,” while 750 or above generally lands you the most competitive rates.
  • Review your credit history reports. Getting a copy of your credit report is easy and free through several websites. The summary document spells out the factors that are damaging to your credit score, but read the details that follow, too — that's where you can find problems resulting from identity theft.
  • Dispute errors and fraud. Under the Fair Credit Reporting Act, credit bureaus are required to correct inaccuracies. And eliminating mistakes from your report can boost your score.
  • Make changes where you can. Some factors that play a role in your credit score — say, the length of credit history — can’t quickly be changed. But others can, so focus on things you can fix in the short term.
  • Take another look at your debt. Reduce revolving credit and avoid payday loans. Doing so will reduce your debt-to-income ratio and free up cash to use in saving for your down payment.
  • Keep that score up. Stay on your best financial behavior. Pay your bills on time, avoid applying for additional credit and don’t close any open lines of credit. Keep your credit utilization ratio low by charging less on your plastic and paying down balances.
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Your credit score carries plenty of weight...a high score can help roll out the red carpet for the best mortgage terms.
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Set yourself up for success
 

Before you can get the keys to your dream home, you’ll need to navigate a multi-step process:

  • Connect with a good realtor. A professional can help you navigate the homebuying journey, recommend trusted professionals (lenders, home inspectors, lawyers), and even negotiate on your behalf. Fees for a buyer’s agent are typically paid by the seller, not by you, though in some cases a buyer may hire an agent and would be responsible for paying their fee.
  • Consult a home lending officer. Before you start popping by open houses, it’s important to find out what your true price range is — which is based on the loan amount you’ll qualify for. Make an appointment at your bank to speak with a home lending officer (also known as a mortgage loan officer) to help determine a home loan that’s right for you.
  • Gather your financials. Check with your realtor or mortgage broker for a run-down of what documentation you’ll need. At a minimum, you’ll need to collect your recent tax returns, proof of income and bank statements.
  • Get pre-approved. Pre-approval — a letter from a lender confirming you are eligible for a mortgage of specific value — is the mark of a serious buyer and an attractive quality to sellers.

The bottom line? Make the right moves today and some tomorrow very soon you can add "homeowner" to your list of accomplishments. 
 

Megan Nye is a personal finance freelance writer. Her writing has been published by Business Insider, Credit Karma, Lending Tree, U.S. News & World Report, Personal Capital and Northwestern Mutual.
 

 

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article. Citibank, N.A.  NMLS 412915. Equal Housing Lender and Member FDIC.