Buying a home is a major life step! Make sure that you have all of your finances in order before you make the big purchase
Are you considering buying your first home? If you are, then you’ll want to learn about the steps you need to take before applying for a mortgage and eventually purchasing your dream home. Since purchasing a home is such a big financial decision, it is extra important that you have all of your finances in order before you start the process.
When you are setting out to buy property for the first time, the process may seem confusing. That’s why we’re here to break down each step you need to take before you begin filling out that mortgage application. There are even some steps that you may not have previously considered as important for buying a home. Let’s dive in and take a look at all of the most important tasks you need to complete before you are ready to take out a mortgage!
1. Take Out a Life Insurance Policy
Buying a home is a major purchase, so it is best to make sure your loved ones are protected
Life is unpredictable, which is why you need life insurance coverage.
Life insurance is important for anyone who is about to take on a large amount of debt. If you are purchasing your first home, there is a good chance that you will need to get the majority of the financing of your home through a mortgage. This presents a big financial risk that requires proper protection through a life insurance policy. In the event that you should die before your mortgage is paid off, your debts will be transferred to your remaining loved ones. In order to prevent this from happening, you need some form of life insurance.
The issue for many prospective homeowners is that getting life insurance coverage often takes too long. When you apply for a standard life insurance policy, you are required to undergo a medical exam as a part of your application. This medical exam includes blood tests that can take up to two months for the results to come back. Because of how long this process is to get insurance coverage, many people are opting to get life insurance without a medical exam.
Getting life insurance without a medical exam expedites the process and can get you covered in a matter of days. While getting insurance without a medical exam is faster, you can expect your premium to be more expensive than if you had undergone the medical exam. However, for many soon-to-be homeowners, the time they save getting coverage is very valuable.
2. Assess Your Finances and Your Credit Score
Making sure all of your finances are in order prevents roadblocks further into the buying process
Applying with a low credit score could burden you with a high-interest rate.
When you go to apply for a mortgage from a lender, one of the most important things they will consider is your financial status. In order to make sure you can afford the loan that you are applying for, the lender will need to see some numbers.
One of the key markers of good personal finance is your credit score. When you are applying for a mortgage, your credit score will help determine your interest rate. If you have a low credit score, you are likely to be charged a higher interest rate which will lead to higher monthly payments in the future. If you have a high credit score, then you are much more likely to be presented with a low-interest rate. The reason that these mortgage lenders charge a higher interest for lower credit scores is due to the risk. If you are in a less-than-ideal financial situation when you are applying for a mortgage, you may have trouble with your monthly payment. The mortgage lender then assumes this risk in the form of a higher interest rate.
It is also a good idea to check your credit score to make sure that there are not any errors. By using a credit monitoring service, you can check your score and make sure that there aren’t any inaccuracies that are keeping your credit score down.
3. Pay Off Any Existing Debts
The lower your debt-to-income ratio, the better chance you will have at securing a mortgage loan
Your application could be denied if your debt-to-income ratio is too high.
After you submit your application for your mortgage loan, one of the first things that will be assessed by the lender is your debt-to-income ratio. Your debt-to-income ratio measures the amount of outstanding debt you have to pay each month versus your monthly income. When the lender assesses this ratio, they are essentially assessing your ability to afford a home. That’s why it is necessary to pay off as much of your debt as possible before you begin filling out your loan application.
When you are calculating your debt-to-income ratio, the lower the number the better. The lower your ratio, the more income you have coming in each month to pay off your debts. If the mortgage lender determines that you have too much debt they can either reject your application or present you with a very high-interest loan. Since neither of these options is ideal for a prospective homeowner, it is in your best interest to pay off as much debt as possible before you begin your mortgage application.
4. Save for an Emergency Fund
Buying a home always has hidden costs—make sure you’re prepared for whatever the homebuying process brings
Your emergency fund may come in handy after you’ve purchased your home.
Just like with any other major expense, there are always smaller hidden costs that come with buying a home. You may have chosen your dream home only to find out that there are additional repairs and assessments you need to go through before moving in. In order to prepare for these types of unexpected expenses, you need to start saving for your emergency fund. We recommend that you keep your emergency savings in an accessible account that will pay you interest while still allowing you to access your funds. While the ideal amount of money to have in an emergency fund is up for debate, it is generally recommended that you save for around 3 to 6 months of your expenses. This way, if there are any major repairs that need to be completed or if there are moving delays, you are already prepared. You can also use your emergency fund to help pay off your mortgage if the moving process goes off without a hitch.
5. Decide How Much You Can Afford
Once you have your finances in order, it’s time to budget for the mortgage you want
Make sure you can comfortably afford your monthly mortgage payments.
Now that you’ve taken all of the necessary steps to make sure your finances look good on your application, it’s time to set a budget. Your budget for your mortgage will depend on a number of factors outside of merely your debts and income. You may have additional expenses related to your healthcare, your parents, or your children. These are important to take into consideration at this budgeting stage before you take on a great deal of debt. It is necessary at this stage to tabulate all of the monthly expenses that you currently have and then add your desired mortgage payment. You also want to make sure that your mortgage payments fit comfortably within your budget. If you are just barely making ends meet, you should consider taking out a smaller loan.
Buying a home is a major life step which is all the more reason to completely prepare before filling out your mortgage application. When you take steps to monitor and improve your financial situation, you can secure lower interest rates on your loan and will feel more confident talking about the required debts. If you feel that you may need some extra assistance managing your finances or finding the right lender, then you should seek out a financial planner for some advice. When you work with a financial planner, they can help you manage your finances, set up an emergency fund, and help you finalize your budget. Once you’ve completed our steps, it’s time to apply for a mortgage! Happy home hunting!