Buying your first home can be a really exciting but stressful time. If you are like most people, after you find the home that you want to purchase, you will sweat bullets until you have signed your name on the last document. To ease some of your anxiety, there are a few money moves that you will want to avoid in the months leading up to your purchase. Not only will avoiding these these make qualifying for your mortgage process easier, they will put you in a stronger financial position to be able to afford the home of your dreams.
Not Understanding Your Debt-To-Income Ratio
Your debt-to-income (DTI) ratio is basically how much money you have coming in divided by the amount of money you have going out. While it is not one of the factors used in determining your credit score, it is a good indicator of your credit health. Even if you have an excellent credit rating, you will have a hard time qualifying for a mortgage if your debt-to-income ratio is too high.
Although it is recommended that you keep your DTI below 36%, most mortgage lenders will allow your DTI to be as high as 43% when approving you for a qualified mortgage. Some lenders may still approve you for a mortgage if your numbers are slightly higher. DTIs between 36 - 43% may put you at an elevated risk of paying higher interest rates with some lenders, especially if you also have some blemishes on your credit.
You have two basic options to get your DTI to where it needs to be. These options are:
- Lower the amount of money you have going out - This can be done by paying off debt that you have outstanding. Consider using some of the money that you have set aside for your down payment to reduce your outstanding debt, or consider consolidating your debt in an effort to lower your monthly payments. Although only the minimum payment required will be used in the calculation of your DTI, you can always pay larger amounts in an effort to eliminate the debt quicker.
- Increase the amount of income you have coming in. Consider taking on additional employment, working overtime, or even requesting a raise. Maximize the amount of money that you are bringing home by cashing out your vacation time, or reducing any deferred compensation you may be setting aside.
Not Going Credit Crazy
Even if you do not have much outstanding debt or credit, the last thing you will want to do when you have a mortgage pending is to run up a lot of debt. Even if you are not planning on using the credit until after you get into your home, it could affect your credit score.
There are two types of credit inquiries. These types are:
- Soft inquires - credit checks that usually are not involved in a lending decision and may even occur without your permission. These include employment background checks and pre-screened credit card offers. Soft inquiries do not have an effect on your credit score.
- Hard inquires - credit checks that are generally run in an effort to extend you some type of credit. While the most common types of these inquiries usually revolve around some type of loan, credit card, or mortgage, you may also have a hard inquiry on your credit as a result of renting, opening bank accounts, and getting utility services.
It is recommended that you attempt to limit hard inquiries to one or two per year unless it is absolutely necessary. This is because each of these can shave a few points off of your credit score, but too many in a short period of time can have a major short term impact on your score. Inquires stays on your credit report for up to two years, although they only affect your score for the first twelve months. You will have enough time to purchase the things you need once your mortgage is approved and signed.
These are just a few of the money moves you want to avoid. There are many more. Avoiding these moves will not only help you secure a mortgage, but continuing to avoid them over time will help to keep you on solid financial footing to continue to make your mortgage payments for a long time to come. Now that you understand what you need to know to make mortgage payments, contact a real estate agent from a company like The Gresham Group to help you purchase your dream house.Share