by Vince Liuzzi
Executive Vice President and Chief Banking Officer, DNB First
It’s that time of year again; the time to think about the goals you’d like to accomplish over the next 12 months. If one of those goals is owning a home, there are some important steps you can take to put yourself in the best position to get the mortgage you’ll need to make it happen:
- Do your homework. Before you start shopping for a home, take some time to study the real estate market and the prices of houses in your target area. Real estate websites, such as Zillow, Trulia, and Realtor.com make it easy for you to browse by area and price ranges.
- Determine how much you can afford. Once you get a sense of home prices, figure out how much of a mortgage you can afford. With a conventional mortgage, lenders generally require that your housing expense not exceed 28% of your income. This number is slightly higher for non-conventional loans, such as Federal Housing Administration (FHA) loans. You can do a quick analysis of how much you can afford by calculating and comparing your income and expenses.
- Know your credit score. One of the most important factors in determining your creditworthiness, or your ability to qualify for a mortgage, is your credit score. A good credit score will not only help you qualify for a mortgage, but also help you earn a better interest rate, thereby saving you thousands of dollars over the life of the loan. Your credit score is actually determined from the information on your credit report, so it’s important to request a copy of your credit report to review your credit history and to ensure no errors have been made. You can obtain your credit report from any one of three major credit bureaus: Equifax, Experian, and TransUnion.
- Do some credit cleanup. By getting a copy of your credit report, you’ll be able to determine what, if any, areas you need to clean up to improve your credit score. Here are some basic steps you can take:
- Address any errors. Credit report errors are very common, so if you see something that may be inaccurate, be sure to dispute it. Ignoring an error could end up getting you a higher interest rate, which could cost you significantly.
- Get current on any debt. If you have delinquent accounts, be sure to make good on any overdue payments as soon as you can. If you can’t afford to pay the entire balance, contact the creditor and work out a payment plan. Don’t ignore what you owe, as inaction could cost you greatly.
- Pay all your bills on time. Get into the habit of paying every bill you have on time.
- Limit new debt. While it may be tempting to save 20% on your purchase at a department store if you open a charge card, doing so could hurt your credit score. Try to limit the amount of credit lines you have.
- Get pre-approved. Before you start shopping for a home, you should obtain a pre-approval from a lender. A pre-approval offers several advantages. It will let you know how much you can afford, allowing you to focus on homes in your price range. Plus, it will give you a negotiating edge with sellers, informing them that you’re a serious and qualified buyer.
So, as you can see, putting yourself in a better position to obtain a mortgage isn’t rocket science. However, if you follow these steps, you can get the best rate and be over the moon in 2016.