There’s a lot to be excited about when it’s time to buy a home, whether it’s your very first place or your next step. To make sure you’re financially ready, it’s important to address some financial groundwork before you decide to start making offers.
How to Financially Prepare to Purchase a New Home
Monitor your credit score and make improvements if necessary
Your credit score can make a big difference when it comes to the loan terms you can secure. Scores of 740 or higher are considered ideal for helping you find the lowest interest rates and most favorable terms. While you can secure a loan with scores as low as 620, you’ll face much higher interest rates and other potential stipulations, such as the cost of private mortgage insurance (PMI).
Learn more about the top three things that can make a big difference for your credit score >>
Avoid opening new credit accounts
Along with monitoring your existing credit score, taking steps to improve it can go a long way toward securing better home mortgage terms. One way to do that is by not opening new credit accounts, such as a new credit card or an auto loan, six months to one year before applying for your loan.
Opening a new credit account typically triggers a hard inquiry on your credit report. Multiple hard inquiries within a short time frame can lower your credit score, which could impact your mortgage approval or the interest rate you’re offered.
Pay down existing debt
While it’s not an absolute requirement to pay off debt before purchasing a home, doing so can offer several benefits:
- It can boost your credit score (which, as mentioned above, can help you secure better loan terms)
- It can lower your debt-to-income ratio, which lenders review before offering you a loan
- It can free up more disposable income that you’ll be able to apply toward your new home
- It can lessen stress, since you’ll have fewer financial commitments to worry about
Save for a down payment, moving expenses and immediate repairs
The costs of purchasing a new home can add up quickly, and it’s important to have the funds on hand to cover them. The biggest upfront cost you’ll likely face is your home’s down payment. Traditionally, a 20% down payment is considered ideal, as it helps you avoid private mortgage insurance (PMI) and also lessens the amount of principal remaining on your loan.
Putting down as little as 3% to 10% could still be a good choice for many buyers, especially if it avoids putting undue strain on your finances. It’s important to balance the immediate down payment with the long-term affordability of the mortgage, including interest rates, monthly payments and PMI costs.
You’ll also need to account for moving costs, such as paying for supplies and a moving service. And don’t forget about immediate repairs you may need to make to your new home, depending on what your home inspection uncovers.
Research payment assistance options
There are several payment assistance options that can help reduce upfront costs and make homeownership more affordable. Researching these programs can ease the financial strain and improve your chances of qualifying for a mortgage.
- Down Payment Assistance (DPA): Grants or loans provided by local, state, or federal programs to help with down payments.
- FHA Loans: Low down payment loans for buyers with lower credit scores.
- VA Loans: Zero down payment loans for veterans and service members.
- USDA Loans: Zero down payment loans for homes in eligible rural areas.
- Local Programs & Employer Assistance: Programs offering down payment help or homebuyer education.
Be sure to check with local lenders, government programs or financial advisors to discover available opportunities. Fidelity Federal offers the Welcome Home Program, an annual program that offers grants for low- and moderate-income homebuyers. The funds can be used to help pay for down payments or closing costs.
Learn about eligibility requirements for the Welcome Home Program.
Secure a pre-approval from a mortgage provider
If you do nothing else from this list, make sure you have a pre-approval in hand before starting your house-hunting journey. A pre-approval gives you a clear understanding of how much you can borrow based on your financial situation, which helps you set a realistic budget and avoid wasting time looking at homes outside your price range.
It also gives you an advantage in competitive markets by showing that you’re serious and ready to make an offer. And it can help expedite closing because the lender has already reviewed your financial situation.
Start Your Home-Buying Journey With Fidelity Federal
At Fidelity Federal, you’ll work with one team member from the beginning of the home-buying process to the end. Our local loan officers will originate, underwrite and close your loan. We’re here to assist you every step of the way, and we’ll do our best to communicate with you proactively.
We offer a special mortgage for first-time home buyers with a five percent down payment, no private mortgage insurance and limited verifications. Another option is the Welcome Home Program, which offers grants for low- and moderate-income homebuyers.
Contact us today to start the process and discuss what loan options are right for you.
