Nationwide, cities are low on inventory for starter homes, and this situation is expected to remain the same in 2021. It is important to get organized for your home purchase now, so you’ll be prepared to make an offer when you find the right home.
Many of these tips apply to current homeowners looking to upgrade to a larger home to raise their family or downsize for retirement, and those looking to make their first major purchase, such as a new car.
1. Review your credit score and credit report
FinLocker makes it easy to monitor your credit report by displaying your credit score on the Dashboard so you can easily see it every time you sign in. If you haven’t signed up for Credit, stop reading this article now, open your FinLocker app, and sign up – it only takes a few seconds – then resume reading this article.
Review each of your credit reports to ensure there are no errors. You can also obtain a free credit report from each of the three credit bureaus from AnnualCreditReport.com. Your mortgage lender will be reviewing your credit report as part of your loan application, so you don’t want any nasty surprises later. Reviewing your credit report now will give you plenty of time to correct any errors. FinLocker has advice on disputing credit report errors inside the app.
Credit scores range from 300 to 850, with a higher credit score indicating a lower credit risk. While a credit score of 720 and higher is generally considered good and will help you obtain a lower interest rate, you can qualify for a home loan with a lower credit score. FinLocker recommends homebuyers achieve at least a 640 credit score to apply for a home loan.
2. Save for your down payment and closing costs
If your goal is to buy a home in 2021, you’ve probably looked at the price of homes listed in your preferred neighborhoods. Use the FinLocker Home Affordability Calculator to calculate a realistic purchase price that you can afford. The calculator will also estimate your costs to close (your down payment and closing costs), which should be a separate savings Goal in your FinLocker.
3. Automate your savings
Open a separate savings account, ideally one that pays interest, to save for your down payment and closing costs. Set up a direct deposit through your company’s payroll or auto-transfer a set amount each paycheck if the savings account is with your current bank. Resist the temptation of getting a debit card for the savings account. If your savings account is less accessible, you are more likely to leave that account untouched.
Enroll your new savings account in your FinLocker to see the account balance grow.
4. Set alerts to pay your bills on time
One of the major contributing factors to your credit score is paying your bills on time. Your lender will want to see that you can pay your existing loans and bills on time before they finance your home purchase.
Sign up for email or text alerts for your credit cards, student loans, utilities, car loan, and other bills you pay regularly. Schedule payments to be deducted from your bank account after each paycheck is deposited to ensure your bills are paid on time. Some financial institutions or vendors may even give you a discount or a reduced interest rate for scheduling auto payments.
5. Calculate your debt-to-income ratio
Mortgage lenders want to be confident that you can afford to repay your home loan each month before they approve your loan application. One of the areas they review is your debt-to-income ratio (DTI). FinLocker makes it easier to monitor your DTI when you enroll in Credit and connect your bank accounts and loans. Use the FinLocker Spending Analysis to see where your paycheck is going and identify unnecessary spending that you can cut back or eliminate.
6. Monitor your spending
If your DTI is above 45%, you need to monitor your spending, stop relying on your credit cards to meet your expenses, and start living within your household budget.
FinLocker users can create a budget for their regular household expenses, receive notifications for staying on track, and alert when they’ve gone over budget each month.
Use the FinLocker Spending Analysis to see where you can make savings to start paying down your debts. Can you change your cable/internet plan to one with minimal service, or cut your cable subscription entirely and replace them with a couple of streaming services?
7. Don’t take on new debt
Don’t be tempted to open a credit card to purchase furniture for a home you haven’t bought. Opening new credit accounts, or being a co-borrower on a loan, may hurt your chances of getting a good mortgage rate. Even transferring a balance from a high-interest credit card to a card with an introductory 0% offer can negatively impact your credit score.
Improve your credit score by paying down the balance of your oldest credit card. Even after you’ve paid off the card, charge a manageable amount each month to keep the account active. Credit history has a moderate impact on your credit score, and lenders want to see that you have a history of being responsible with various types of credit.
8. Reduce clutter by selling unwanted stuff
Take an honest evaluation of the stuff you don’t use or need around your home. Challenge every family member to identify five items such as clothes, shoes, toys, sporting equipment, etc. that no longer fits or isn’t used. Identify the most appropriate selling apps, then take a photo of the item with your phone, post a description, and sell your items. Split the profit 50/50 for each item your kids donated, and use the remaining money to pay down debt or add to your savings account.
Keep selling until you’ve reduced your unwanted items. You’ll have reduced the clutter around your current home and made it easier to move when the time comes to buy your new home.
9. Start gathering your documentation
Whether you are buying your first home or selling a home and buying a new home, there is a basic set of documents that all mortgage lenders will require for your loan application. Start gathering the documents now, and upload them to be stored securely in the Document folders in your FinLocker. When the time come to apply for a loan, you’ll be able to select which documents to share with your lender, and transfer them securely for your loan application.
- Pay stubs covering the past two pay periods or 30 days
- Leave and Earnings Statement (military)
- Past two years’ W2s
- Federal tax returns for the past 2 years, if you are self-employed, own a business, a commissioned employee (25% or higher), an employee with unreimbursed business expenses or real estate income.
- Divorce decree and settlement paperwork for separate maintenance (if applicable)
- Statements covering 60 days for checking and savings accounts, investment and retirement accounts. FinLocker users can transfer accounts connected in their locker to their lender for asset verification.
- Information for real estate already owned (use, income, if it’s on the market, estimated value, mortgages)
- An explanation for credit mishaps. Bankruptcy and discharge paperwork (if applicable)
- Divorce decree and settlement paperwork for child or spousal support expenses (if applicable)
- Documentation disproving any erroneous items on your credit report
- Driver’s license
- Social security number
- Certificate of Eligibility (military)
10. Reconsider renewing your lease
If you are currently renting, review your lease for an “early termination” clause and compare any costs of changing to a month-to-month or six-month lease when the time comes to renew. If you love the home you currently rent, you could even make your landlord an offer to buy the property.