Getting pre-approved is the best way to be an intelligent buyer.
Let’s talk about the importance of getting pre-qualified, or even pre-approved, before shopping for a house. Thinking about changing your address and looking at homes in great neighborhoods with all the features you love can be exhilarating. Still, if you don’t know what you can afford, it’s not really a good use of your time to look at a home that doesn’t fall within your range.
Some people are intimidated by digging into their financials. It sounds like a lot of work, and you might not even like the house. However, this is essential to ensure you’re shopping for a home you can afford. If you want to dive into it before talking to a mortgage lender, you can get your credit score from Experian.com. They are one of the three big credit bureau agencies that report to mortgage lenders. You can get an annual report for free, which will give you an idea of where that number is. Some people don’t even have credit scores because they’ve never had a loan or they’ve never had a credit card. The credit bureaus have no information on them at all—they have to establish credit. That can be done easily enough. Many people will just open a secured credit card, use that credit card for buying gas, and pay it off every month. The rate at which you pay your bills, meaning timely and consistent in an ongoing manner, defines how good your credit score is.
“If you don’t know what you can afford, it’s not really a good use of your time to look at a home.”
The other thing that you could take a look at is your debt-to-income ratio. Many lenders want your debt-to-income ratio after buying the house to be about 43%. Let’s say that you make $60,000 a year. Right now, you’ve got a car payment, and you’ve got a credit card payment. So you’ve got less than 20% of your take-home pay for those two debts. However, once you have a house, let’s say you buy a home that’s $215,000, an interest rate of 6.25%, 3.5% down. You’re going to have an $1,800 monthly mortgage payment. Now, let’s add that to your student loan and car payments. And now that’s the total they will measure against $60,000. And in the example I just gave you, with that $1,800 payment plus, I used a number of around $500 for a car payment and then a credit card payment. The numbers came in at 39%. That’s a perfect guideline for you to say what kind of house fits into this $1,800. In this example, it is a $215,000 house.
Those are some things that you could work through on your own. If you want to talk to me about that, I would be happy to help you identify those numbers. That way, when you sit with this mortgage professional, you aren’t caught off guard about what they’re looking for, and you actually had a chance to run some numbers on your own. Getting pre-approved and getting pre-qualified are essential pieces for changing your address.
If you need additional information about this topic or have real estate-related questions, call or email me. I’d love to hear from you.