We all know that the busy season for buying homes starts in the spring and runs through early summer. That means that right now, in the middle of winter, is when anyone considering buying a home this year should focus on getting their finances in order. There are moves you can make today that will pay off two or three months down the line when you apply for a mortgage. Here’s how to home in on getting your financial house in order before you embark on buying a new home:
Aim for a Credit Score of at least 740. You can get a mortgage with a credit score below 700. But it is going to cost you. The lower your FICO credit score the higher your interest rate will likely be. And over the length of a 30-year mortgage the difference between a great interest rate and a so-so interest rate can be thousands of dollars. Even if you can’t get to 760 or higher, realize that moving your credit score up just 10 points or so could bump you into a better score range that will improve your loan terms. Every little move will be a big help in reducing your borrowing costs.
Rein in Your Credit Card Spending. A big part of your credit score is determined by what is called your utilization ratio. That’s a fancy term for adding up all your credit card balances and dividing it by the total credit limit you have on all those cards. The lower your utilization ratio, the better. If your ratio is above 30%, I want you to double down on reducing your spending over the next few months and do everything you can to pay down the balance.
Aim for a Higher Down Payment. Okay, you know that I believe a 20% down payment is the smartest move. Not only does it show you have the financial focus to save up, but it will also make you eligible for the best mortgage terms. That said, I know many of you will be borrowing with a down payment of less than 20%. You can get loans today that require a down payment of as little as 3% to 3.5%. But please listen to me: there is no free lunch. Loans with down payments below 20% require you pay for extra mortgage insurance. That’s true of all FHA-insured loans and all conventional mortgages. But the insurance cost will depend in part on the actual size of your down payment. For example, the insurance cost if you make a 5% down payment will be less than if you make a 3% down payment. A 10% down payment will save you insurance money compared to a 5% down payment. So while a 20% down payment may be out of reach, here’s a challenge for you: See if you can cut your spending so much in the next few months that you can make a slightly higher down payment.
Don’t Make Big Financial Moves. When you do eventually apply for a mortgage, the lender will ask for all sorts of financial documents. One thing that makes lenders nervous is if you are moving money around different accounts. So, hands off your accounts for a few months. And goodness, do not buy any big-ticket items until a week after your mortgage closes. I know how excited you will be to furnish your new place, or make some renovations. But lenders will keep checking your financial situation until the day your mortgage closes. If you suddenly have a big spending splurge, it might throw your credit utilization rate off, and that could cause you headaches with your lender. Buy the house first. Then when that’s a done deal you can focus on purchases for your new home.