There are plenty of guides for how to navigate the home-buying process once you’re already in it. But for many, just being in the financial position to start looking for a home is a far-away dream.
If that’s you, here are five New Year’s resolutions that will put you closer to owning a home by 2016.
1. Save money/refinance
This one is painfully obvious, but also so crucially important that we have to talk about it. It’s the first thing Julian Morris, the managing director of Concierge Wealth Management, tells his clients: “If you’re a first-time homebuyer, start saving right away for a home.”
Before the 2008 crash, first-time buyers could sometimes get away with loans that didn’t require any down payment, but those have largely evaporated. A new buyer should now expect to pay a lump sum of at least 3.5 percent of the house’s value. The bigger the down payment you can afford, the better the mortgage deal you’re likely to get.
If you already own a home, but are dreaming of a move, Morris suggests you take a look at your current mortgage. “You should check your rates and make sure you have the best deal possible,” he said. “You might save money over the long term by refinancing before the rates go up.” A little less money towards your current mortgage every month means a little more money you can put away for a future down payment on a new place.
2. Check your credit score/raise it
It’s important to be very familiar with your credit score and credit history, since they’re two of the biggest factors banks will look at when deciding whether or not to give you a loan. Morris says an easy, free app like Credit Karma is a fine place to start.
Don’t panic if your credit score is lower than you’d like. (According to Zillow, the median credit score in the US is about 720 and you can start expecting good mortgage rates at that level.) A year is plenty of time to significantly improve your credit.
The best methods are the most basic – pay your bills on time and pay off your credit card balances every month. If you have any late payments, you can sometimes get them eliminated through a company’s one-time forgiveness policy if you take the time to dispute it.
Morris also suggests people follow the “Rule of 3” by keeping only your big three credit cards, even if you’re keeping up with payments on the others. “Extra cards with $0 balances can actually hurt, not help, which is contrary to popular belief,” Morris wrote for a Boston.com blog. “Close out your extra cards with zero balances that you have not used in six months and have no plans to use over the next six months.”
3. Get your documents in order
Filling out a mortgage application is financially intrusive, to say the least, but, if you have all your relevant forms handy the process will be a lot smoother. It can also help you get a better sense of where you stand in terms of loan qualifications.
Bankrate, a financial data website, has a quick list of the most important documents you’ll need, including tax returns, W-2 income statements, recent pay stubs, credit card statements, bank account statements, and divorce or child support documents.
4. Research government programs
If you’re looking for a traditional mortgage loan from a bank, it’s always important to shop around and compare rates and other package details. But if you don’t think you’ll qualify for any rate you can afford through the normal channels, there are other options.
MassHousing is a state agency that offers support and counseling for low- to middle-income buyers. The agency also offers its own loans that can be safer and more affordable than bank loans.
The Federal Housing Administration offers a similar loan program and may be within reach for people with lower credit scores (though there is still a minimum score of 500).
5. Get a pre-approval
If you feel your finances are up to snuff and you’re ready to actually start the process of searching for a home, a good place to start is with a loan pre-approval. Michael Breer, a real estate agent with Sotheby’s, says it can be especially helpful for new buyers. “One of things that I encourage all first-time homebuyers to do is to obtain a pre-approval letter from a financial institution indicating approval for a loan up to a specific dollar amount,” he wrote at Boston Real Estate Reporter. ‘This is significantly different than, though often confused with, a pre-qualification, which is essentially just a cursory review of your financial history that does not ensure a loan will be granted.”
A pre-approval doesn’t guarantee anything, but it means some legitimate financial institution has looked into your background and determined what kind of loan you should qualify for. That signals to real estate brokers, sellers and other lenders that you’re the real deal. It can grease the wheels on your whole home buying process and put you that much closer to moving in.