The excitement of choosing a floorplan, envisioning your rooms and selecting options is undeniable, but before you get to that fun part of purchasing a new home, you need to be financially ready.
In fact, your financial preparation should begin before you start looking at new homes so you can visit models with confidence about your budget and your ability to pay for your new home.
Start with Your Credit
If, like most people, you haven’t reviewed your credit reports, start by requesting your free credit reports from all three credit reporting bureaus (Equifax, Experian and TransUnion) at www.annualcreditreport.com. You can also pay a small fee to receive your credit score. Check for inaccuracies: it’s estimated that one in four credit reports has a mistake. Correcting those mistakes can take time.
You should aim for a credit score of 740 or higher in order to pay the lowest interest rates. If your credit score is less than 640, you may have trouble qualifying for a conventional loan. If you’re making a down payment of less than 20 percent, you’ll need to pay private mortgage insurance. Mortgage insurance companies base their rates on several factors, including your credit score. Even if you qualify for a loan, you could be paying a higher interest rate and higher private mortgage insurance premiums if you have a low credit score. An FHA (Federal Housing Administration) loan, insured by the government, is an option, but these loans also require you to pay mortgage insurance.
Improving your credit score can take months or longer depending on your individual issues, but if you’re having a home built you can use that time to boost your score.
To gain points on your credit score:
- Pay all your bills on time
- Reduce your debt to less than 25 percent of the credit limit on each credit card
- Pay off balances in full on your credit cards if possible
- Even if you normally pay your balance in full, the credit reporting bureau may show a balance depending on the day you look at your statement. Consider paying the balance earlier or making several payments during the month.
- Don’t cancel any credit cards. This will reduce your overall credit limit and could hurt your score.
- Keep your oldest credit account open. A longer credit history helps your score.
If you’re concerned about your credit or want to increase your credit score, you should discuss this with your lender. Lenders are savvy about credit and can tell you which steps could be most helpful for your individual situation.
Develop a Budget
In addition to improving your credit, you should take a careful look at your overall financial profile and decide how much you want to spend on housing. A lender can tell you the maximum you can borrow, but you should know yourself whether a payment of $2,000 per month or more or less is comfortable for you given your other expenses.
A lender can see your credit profile and recurring debt expenses, but only you know how much you may want to spend on vacations or golf or to invest in your retirement account to meet your other financial goals.
Prepare for Meeting with a Lender
It’s wise to choose a lender with experience financing new construction. Even though the process of financing a newly built home is similar to taking out a mortgage for a resale property, there are some nuances that an experienced lender can help you understand.
Many builders provide a list of preferred lenders and some larger builders have their own in-house or affiliated lender. You may be offered an incentive to work with one of these lenders such as the inclusion of some optional features or to have your closing costs paid. While it’s natural to want to take advantage of these incentives, it’s also a smart idea to shop around and ask one or two other lenders about their loan programs to make sure you are getting a good loan with competitive fees. More than likely, you’re better off working with the builder’s preferred lender because of those incentives and because of the established relationship between the lender and the builder, but you should still take the time to compare loan options.
When you’re ready to consult a lender, you should be prepared with questions about your choices of loan types, what to expect during the time your home is being built and how much you will have to pay at the closing. A good lender should be willing to educate you about the entire mortgage process to help you make a good decision about your loan.
Come to the meeting prepared with an idea of your preferred monthly housing payment, an estimate of your available cash and other possible sources for your down payment.
In addition, you’ll need information for a loan pre-approval, such as:
- Bank statements for all accounts including retirement funds, stocks, bonds, mutual funds, checking and savings accounts (print these if you bank online)
- A recent pay stub for 30 days of income which also shows year-to-date income
- Proof of other income such as a second job, alimony or bonuses
- W-2 forms for the past two years
- Two years of your job history with addresses for all employers
- Two years of residential addresses and landlord information
- If you are self-employed, you will also need the most recent two years of tax returns
- Social Security number to check credit reports and driver’s license for additional identification
Your loan pre-approval, based on a review of your credit, income and assets, is essential to understanding how much you can borrow to buy a home and provides proof to builders that you can finance a purchase.
Financial preparation for homeownership is an essential step to buying your new home and having the confidence to enjoy the experience of personalizing it to meet your tastes and needs.
Written by Michele Lerner, this story originally appeared in the May/June 2017 issue of New Homes Guide. Reserve your free copy of New Homes Guide today for additional stories, tips, how-tos and more.