The mortgage and homebuying process is typically not an easy one. You need to have your finances, and your financial documents, in good order if you hope to get approved for a loan to buy a home. If you want to buy a house in 2016, here are several New Year’s resolutions to follow through on that can help make you a better homebuying candidate.
1. Create and Stick to a Budget
The new year is a great time to rework your budget, and to see if you have the room in your finances for the extra costs that come with a new home. “Once you move, the budget will certainly change — especially if you are moving from a rental to a home,” said Andrew Gipner, a certified financial planner with Longview Financial Advisors in Huntsville, Ala.
Some of the costs to plan for include things from home maintenance costs to “the potential increase in variable expenses, such as electricity and water, [and] additional expenses of property tax, insurance, private mortgage insurance … and maybe even homeowners association fees,” said Gipner. After you’ve accounted for all these extra expenses and added them up, you’ll have a clearer picture of how buying a home could affect your day-to-day finances.
Once you have a budget, you should take it for a test drive, suggested Katie Wethman, a certified public accountant and Realtor in the Washington, D.C. area. “Stick to your projected budget in advance,” she said. “Start following your new budget as soon as possible, and put any extra savings into a separate account.”
As you do this, you can see if this budget is realistic, making necessary adjustments to your spending habits — as well as your expectations for the kind of home you want to buy. “Then you’ll be used to living within your means, and you’ll have a nice balance in your savings account to get you started,” Wethman added.
2. Pad Your Homebuying Fund
Ideally you’ve already started setting money aside to purchase a home, if that’s a move you plan to make in 2016. However, it never hurts to further add to the funds you’ve stored to cover the costs of the purchase itself, from the down payment to closing costs and loan origination fees. If your homebuying savings are lacking, adding more to this fund would be a good goal to set for the new year.
How much you’ll need to have saved might depend where you live. A 20 percent down payment is a standard recommended amount to get a standard mortgage and avoid private mortgage insurance costs.
You can still get a mortgage with much less down — as little as 3.5 percent if you take advantage of a down payment assistance program, said Joshua Jarvis, a Realtor, and CEO and founder of Jarvis Team Realty in Georgia. But even these programs have other costs associated with them. “There’s some out-of-pocket expenses, such as inspection, appraisal and potentially others, depending on the state,” Jarvis said.
3. Save an Emergency Fund
In addition to a down payment and homebuying fund, homebuyers should also have a separate emergency fund saved. Having an emergency fund is always a good idea, but it becomes even more important when you’re a homeowner.
“Make sure that an emergency fund is fully funded in the event something goes wrong in the new house,” Gipner said. As you take on the liability of owning a home, you’re opening yourself up to getting hit by more frequent and more expensive emergency costs. For example, Gipner said one of his friends had to replace their water heater the day they moved into a new home. “With an adequate emergency fund — which should be between three to six months of your fixed and variable expenses — the replacement of things like your water heater can be [planned] for,” Gipner said.
There’s also an added bonus of having a nice emergency fund set aside: It makes you a more attractive borrower to lenders. If you have “proof of reserves,” or savings account statements showing you have three or more months’ worth of mortgage payments saved up, this will show that you won’t be broke after closing on the home, according to U.S. News. A lender might be more willing to approve you, or give you better terms, if you show you have savings on hand to cover emergencies like a loss of income.
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4. Get a Raise
Your income is a central factor that lenders consider when processing your mortgage application. It’s also the main determinant of how much home you can afford — or if you can afford to buy a home at all. Finding a way to increase your take-home pay will help you work toward other goals, like saving more and budgeting smarter, while at the same time helping you qualify for a home loan.
“Potential homebuyers often are not aware of their ‘qualifying income,’ which is the income a lender will use to qualify them for a mortgage relative to their debts,” said Matt Hackett, operations manager for Equity Now in New York City. To know if you’ll be able to meet these income requirements, Hackett recommended meeting with a reputable lender right away to see where you might be falling short.
If your income is a concern, it might be time to start working toward a raise. Since you have a few months to plan, start working hard and keep a record of how you add value to your team. When the time comes to ask for a raise, you’ll have some proof that you’ve increased you value to the company and deserve to see a raise in compensation to match.
However, when you’re preparing to buy a home, switching jobs can complicate your mortgage process, even if the new position comes with a jump in pay, according to mortgage entity Fannie Mae. Home lenders like to see a steady source of income, so it’s best to be able to show that you’ve been with your employer, or at least that you’ve earned consistently, for at least a year or two.
5. Improve Your Credit
In addition to income, credit history is another major factor when lenders consider your mortgage application. Those planning to buy a home in the near future can improve their chances of approval and getting favorable terms by working to improve their credit.
“A small rate change can really make a difference when you’re speaking about borrowing hundreds of thousands, or even millions, over decades,” said Elle Kaplan, CEO of LexION Capital Management in New York City. “That’s why I tell clients … that it’s worth it to delay getting a mortgage until their scores are as close to perfection as possible. The wait is definitely worth the savings you’ll receive on your dream home.”
While big credit score changes might take months or even years to achieve, you can still give your credit a boost by taking some positive actions. One way to boost your credit can be to pay down your debt, because your amount of debt is a major factor in your credit score. If you can pay down your credit card balances, your score could increase, according to credit score company FICO.
Also, apply for credit sparingly in the months leading up to your mortgage application. Getting a new credit card or an auto loan can be a red flag to mortgage lenders if you get one too soon before applying for a mortgage, according to mortgage entity Freddie Mac.
6. Pay Down High-Interest Debt
Those with high-interest debt like credit card balances should make paying them down a top financial resolution for 2016. “You should absolutely pay off any and all high-interest debt before purchasing a home,” Kaplan said.
Because these types of debt have high rates that work against you, they are more expensive and take longer to pay off. If you take on homeownership without getting rid of this debt first, “a mortgage will stretch your already-stressed finances even further, and make it even more difficult to tackle high-interest debt,” Kaplan said.
In addition to paying down debts, homebuyers should also resist the urge to charge. “Stay clear of big purchases during the process” of buying a home, said Bobby Atkisson, a branch manager with Community First Home Loans. “Anything you add to your credit will be added to your debt-to-income ratio. If you purchase a big item that has a high monthly payment before your loan closes, this could set off some serious red flags and eliminate your approval.”
7. Learn Some Home-Care Basics
One of the biggest benefits of owning a home is that you now have an investment. While there are still plenty of costs to homeownership, at least some of those will be going toward building equity in your home. “Your home is your biggest financial and physical set of assets that need to be managed, maintained, improved and eventually marketed when you want to sell in the future,” said John Bodrozic, co-founder of home management app Homezada.
Managing your home and preserving, or even building, its value will take some know-how. Pablo Solomon, an artist and designer who consults on home remodels, said to start investing in some basic tools, and learning about home care.