Financing Preparation Steps For Buying A Home This Year

There are a lot of important decisions to make when buying a home, and they can either bring you extra costs or opportunities to save money. When you consider the amount of money you are financing over the term of the home loan, you want to make sure you are prepared for the most success when you start the home-buying process. To help you get off to a great start, here are some financing preparation tasks you can complete before you start shopping:

Pay Off Revolving Debt

This step is one that you can start several months or even years before you want to buy a home. The more revolving or unsecured debt you have from credit cards, the more time you may need to put toward paying down your debt. Excessive revolving debt on your credit report can reduce your credit score and also tie up extra income each month that you would be better off putting toward your mortgage savings or your actual mortgage payment.

Different from an installment loan, revolving debt on your credit report does not have a definitive term limit to its life, as you can charge up and pay off a credit card an unlimited amount of times. Even if your credit limit is not maxed out, your entire credit line can be considered potential debt and have a negative impact on your credit. Before you talk to a mortgage broker about getting pre-approved for a mortgage, pay down or pay off as much revolving debt as possible, and close some accounts to improve your credit score.

Get Mortgage Pre-Approved

When you are ready to apply for a mortgage, the condition of your credit and your credit score will help determine the type of mortgage programs you can qualify for. The type of mortgage you can qualify for can make the difference in the amount of interest you pay for over the loan's life. For example, if your credit score is lower, you may not be able to get approved for a fixed low rate that is available to borrowers. Instead, you might have to go with a higher rate loan, or a loan with an adjustable rate that will slowly increase each year you have the loan.

Talk to a mortgage broker about applying for your mortgage so they can request your credit file and begin the pre-approval process. In addition to your credit, your mortgage broker will also look at your income and employment length to determine your borrowing potential. All the revolving debt you paid down will improve your debt-to-income ratio and free up more of your income to put toward your future mortgage payment.