The home buying journey is one of the most rewarding experiences that money can buy. However, it’s important to understand how to best prepare for the ups and downs of the transactional side of the process. Here are five steps you can take in 2019 to ease the overall experience of buying a home.

1. Improve Your Credit Score

    

Having a strong credit score is critical for home buyers because it not only directly impacts the size of the loan you qualify for, it affects your interest rates. Before getting started with improving your score, it’s important to figure out exactly where you’re at in regards to your credit history.

There are a few different ways you can check your credit score, here are a few resources: Equifax, TransUnion, and Experian.

If you discover that your credit score is in need of some TLC, there are a few ways you can raise your score over the next year.

• Closely Review a Full Credit Report – The Fair Credit Reporting Act (FCRA) gives you the option to obtain a free credit report from each of the three nationwide consumer reporting companies once every twelve months. Your credit report contains information including your current and past residences, how you pay your bills, bankruptcies, foreclosures and more. This will give you an idea of where to make improvements.
• Use a Credit Report Repair Company to Dispute Errors – According to a Federal Trade Commission Study in 2013, more than 40 million Americans had something incorrect on their credit report. Make sure to follow-up on any discrepancies to ensure that your score is as high as possible.
• Spread Credit Debt Across Multiple Cards – If any of your credit cards are close to reaching the credit limit, it will be a red flag to lenders. If you have multiple cards, spreading the balance out will lower the chances of triggering a reason for concern.

2. Save for a Down Payment

    

A healthy savings account allow you to establish your future financial independence, but it is also a necessary item on your checklist for preparing for your house hunt. Getting an early start on saving a twenty percent down payment will ultimately lower the stress of buying a home.

However, if you are getting started with saving now, there are a few ways to avoid putting twenty percent down. One option to lose the need of a sizable down payment is to add PMI insurance from your mortgage lender. This type of insurance protects the lender in case you default on your loan payment. Additionally, there are other types of home loans such as military specific loans that allow you to put less money down.

3. Maintain a Healthy Debt-to-Income Ratio (DTI)

    

The debt-to-income ratio is a lender’s way of assessing your expenses and other debts with your monthly income. As you can imagine, mortgage companies are more inclined to offer lower interest rates for individuals with a balanced DTI.

So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better – but there are two different types of DTI’s that lenders take into consideration:

• Front-End DTI – housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.
• Back-End DTI – includes all other debts such as credit cards or car loans. An ideal back-end DTI is less than 36%.

4. Budget for Extra Costs

    

There are several different steps of the home buying process that are overlooked by first-time buyers. Most of these costs, such as taxes and home insurance, can be wrapped into your mortgage. However, there are a few other items that should be considered when budgeting for the upcoming year.

• Appraisal Fee
• Inspection Fee
• Geological study
• Closing costs
• Property taxes
• Utility hookup/start fees
• HOA fees
• Title Insurance

5. Do Your Research

    

Whether you plan to buy in Pennsylvania, Florida, New Jersey or Michigan doing research in advance will ensure that your new property will be a worthwhile investment. The key to beginning your research is to determine which variables are most important to you. Are you looking for sizable square footage? Do you want convenient commuter options? Is a lower monthly mortgage payment a priority?

• Neighborhood – Location is one of the highest sought-after features for new home buyers. Using resources such as Walk Score will help you find the right commute times and location for your home. Your realtor can also help determine which schools would be the best fit.
• Interest Rates – Make sure to monitor interest rates throughout the year. Why are small hikes in interest important? As a quick breakdown, just a one percent increase in interest on a home loan is the difference of paying or saving tens of thousands of dollars over time.

Guest Written By:
Angie Bersin
Marketing Coordinator
REDFIN