How many did you take?
- Orman says to focus on credit, debt and expenses before looking for a new home.
- Skipping these steps can put you in financial trouble later on, or even prevent you from getting a mortgage.
Before buying a house, it is crucial that you are in a good position to obtain a mortgage and are prepared to meet the financial responsibilities of ownership. It can be difficult to know when you’ve reached these milestones and are ready to call a real estate agent, but finance expert Suze Orman has some tips that can help.
Orman recommends taking these five steps before buying a home to ensure you can get an affordable mortgage and cover new costs.
1. Improve your credit score
First, Orman suggests working to improve your credit score if it’s below the 740 to 760 range. Borrowers get the best deal on a home loan with a score above this threshold. Although you can buy a home with a much lower score — as low as 620 for a conventional loan, or around 500 for government-backed loans — you get more options with better credentials.
While Orman acknowledges that not everyone can achieve a credit score of 740 or better by the time they want to become a homeowner, she points out that the more improvements you can make, the better your mortgage rate is likely to be.
2. Reduce credit card balances
Although Orman says it’s ideal to pay off your card in full each month, many of us end up with a balance. Reducing a balance can make a big difference in qualifying for a better home loan.
Its recommendation is to aim for a credit utilization ratio of less than 20%. This means using only 20% or less of the total available credit. Following these tips could also help improve your credit score (utilization rate is an important factor in the scoring formula) and improve your debt-to-income ratio (the ratio of total debt to income, which lenders take into account).
3. Pay off other debts
The debt-to-income ratio is an important consideration for mortgage lenders – they want to know that you are not overcommitted and can pay off your home loan. Orman says the ideal debt-to-income ratio is below 36%. If you owe more than that, it’s a good idea to pay off your debts before buying a home.
4. Avoid buying unnecessary products
Orman advises becoming a “shopping miser” for a few months before buying your home. This is important because even if you pay your credit card balance in full each month, card issuers sometimes report the balance before the monthly fee is paid. If you’ve loaded a lot on your cards, it could worsen your debt ratio, affecting your mortgage approval or rate. If you charge as little as possible, you won’t have to worry.
5. Build cash reserves
The finance guru’s latest recommendation is to build an emergency fund with eight months of living expenses before buying a home. This is advisable both because lenders like you to have a large cash cushion and because you will have the cash you need if something goes wrong after you buy your property.
If you haven’t completed any of these steps yet, seriously consider whether buying a home right now is the right decision for you.
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