Preparation is the key to closing on a real estate deal, and one of the top obstacles people face is their financial situation. Unless you can pay for the house with cash, you’ll need to take out a loan. So before you even start the search you need to know how much home you can afford and what to do if you don’t like your options. Follow these three steps and you’ll be ready to go home shopping in the least amount of time.
1. Get a credit report
If you haven’t gotten a credit report recently, go get one right away from annualcreditreport.com. This site will give you a report from each of the three major credit reporting agencies and is the only site that truly provides a free credit report. Other sites that claim to offer free reports usually sign you up for a bundled credit monitoring service.
The credit report will include open and recently closed accounts. Look through the accounts to make sure there are no surprises. You’ll want to get to the bottom of any inaccuracies you find. An unexpected account may be a sign of identity theft, a clerical error, but sometimes is an account you forgot about. Proceed to step two once you know your credit history is accurate. Just don’t go closing, opening, or consolidating any accounts right now or you run the risk of lowering your credit score!
2. Call a lender to put a plan together
The purpose of calling a lender is to know how much home you can afford, how much cash you need to bring to close, and what your monthly payment will be. You may be pleasantly surprised to find out you can afford more home than you initially thought! If you are happy with the purchase price, monthly payment, or cash requirement skip over to step three.
The purchase price, monthly payment, and cash requirement are greatly influenced by the loan program being used, of which there are many. The bigger national banks tend to offer cookie-cutter programs. If you don’t meet their criteria, you may want to check in with a smaller local shop, which tend to offer a greater variety of options. A different type of loan might be just the ticket to homeownership.
Sometimes you still need to work on your finances to get the type of home you want. Work with your lender to put a plan together. You will typically do one or more of the following:
- Work on your credit score to lower your interest rate or qualify for better, more flexible programs. Be sure to follow expert advice when tuning your credit score so you don’t inadvertently lower it!
- Pay off some debt so you can afford the monthly payment, but don’t deplete your savings.
- Increase your income. Most of us can’t increase our incomes at the snap of a finger, but you may be able to add a co-signer to have their income considered.
- Accumulate cash by cutting unnecessary expenses, or receiving a gift from family.
3. Get a pre-approval letter
Once your finances are in order, ask the lender to generate a pre-approval letter. This letter gives you the confidence that you can obtain a home loan as long as your financial picture does not change. Many sellers refuse to accept an offer unless it is accompanied by a pre-approval letter. The pre-approval letter is not a loan commitment, so it is best to hold paying off loans, taking on more debt, or changing jobs until after you close on your home.