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In fact, your finances are so important that you’ll want to start working on them well before you’re ready to apply for a mortgage. That way, if you need to improve your finances or your credit, you’ll have some time.
We’ll delve into tips about how to get your finances ready to buy a home so you can prepare for the process.
Step 1: Know what lenders are looking at when assessing your finances
When you apply for a home loan, lenders want to assess whether you’ll be able to pay them back. They’ll check to see that you have a steady income and look at how much cash you have available to cover a down payment, closing costs, taxes, and other expenses. Recent banking activity, investments, and other aspects of your finances will come under the microscope too.
If you’re a candidate for a no-down-payment loan, such as a VA loan through the Department of Veterans Affairs, you’ll need documentation to prove it.
Lenders will also check your credit to assess your history of paying your debts and look at how much outstanding debt you have.
Different lenders may look at different things when checking your finances, but the goal is the same — to help decide whether to risk lending you money and how much interest to charge. Here’s a list of what lenders are likely to consider.
Desired loan amount compared to the value of a home
Total debt compared to income — your debt-to-income ratio
Rental history (if you’re currently renting or have rented in the past)
To improve your chances of getting a home loan with the best possible terms, you should save as much as you can for your down payment, get your debt-to-income ratio under 43%, and do what you can to improve your credit scores. Specifically, we’re talking about the scores compiled by Fair Isaac Corp., known as FICO, which are the mortgage industry benchmark.
Step 2: Take stock of your credit scores and credit reports
It’s not possible to say exactly how to raise your FICO® scores — everyone’s personal situation is different — but there are a few practices that can usually help, especially if you adopt them a year or more before you apply for a mortgage.
Pay your bills on time — Your credit scores will fall if you’ve missed payments on a credit card or another debt.
Use less of your available credit — Your credit utilization ratio, which measures how much debt you’ve taken on compared to what’s available to you, is an important factor in your scores. Using less than 30% of your available credit may lift your scores. Paying down your debts may also lower your debt-to-income ratio, another measure that doesn’t affect your credit scores but is used by banks to assess your creditworthiness. (We’ll explain later.)
Hold off on opening new credit accounts — When you apply for credit, a lender will initiate a hard credit inquiry, which will have a temporary negative effect on your scores.
Maintain a mix of credit accounts — Your credit scores are affected by what kinds of credit accounts you have, how old they are, and how many of them you have. If you’re managing a mix of different types of credit without trouble, you’ll look less risky to lenders. Note that you shouldn’t open new accounts just for the sake of creating this mix (see point above).
If you have poor credit and stick with these approaches, your credit scores are likely to rise over a period of months. If your credit improves, lenders may see you as a better risk and charge you a lower interest rate on your mortgage.
Why should you worry about your credit scores? Imagine getting a $250,000 mortgage that lasts 30 years and has a fixed interest rate. Take a look at the table below to see how credit scores affect how much you could pay just in interest (not counting the actual money you borrowed) over the life of the loan. You can plug in your own information on FICO’s site to get a better idea of what your interest payments could be.
FICO® score
APR
Total interest paid
760 to 850
2.422%
$101,970
700 to 759
2.644%
$112,384
680 to 699
2.821%
$120,811
660 to 679
3.035%
$131,145
640 to 659
3.465%
$152,384
620 to 639
4.011%
$180,245
Note: Rates change frequently. The rates in this example were selected on Oct. 7, 2020.
Step 3: Save for your down payment: Bigger is better
You should save as much as you can for a down payment. A bigger down payment means you’ll own more of your new home from the start. This makes you a lower-risk borrower in the eyes of lenders and usually translates into a lower interest rate on your home loan.
Another reason to put down more cash is to avoid private mortgage insurance or PMI. Most lenders will require you to buy PMI — which protects the lender in case you default on your loan — if your down payment is less than 20% of the purchase price of your home.
The cost of PMI depends on the type of mortgage you get, how much you put down and some other factors, but usually costs between 0.5% and 1.5% of the loan amount each year and can add up to thousands of dollars.
Plus, you’ll want to factor in additional closing costs, which can include home inspections, an appraisal, and escrow costs, like homeowners insurance and property tax payments.
Step 4: Measure your debt-to-income ratio: Getting to 43%
Your debt-to-income ratio, or DTI, — which measures your outstanding debt as a percentage of your income before taxes — is used by lenders as another way to gauge your ability to repay your mortgage.
Your DTI ratio is calculated by adding up all your current monthly debt payments (think student loans, personal loans, credit cards) and your proposed mortgage principal, interest, taxes, and insurance payments, and then dividing that number by your gross monthly income (your income before taxes and other deductions).
For a qualified mortgage — a home loan that meets certain regulatory requirements put in place in 2014 to protect lenders and borrowers — you’ll need to have a DTI ratio of 43% or less.
Lenders can extend loans to borrowers who have a DTI ratio higher than 43%, but you generally need a compensating factor like high cash reserves, and even then it’s rare. Lenders consider a higher DTI risky for both you and the lender, as it suggests to them that you may struggle to pay your mortgage and keep up with all your other debts.
If your DTI ratio is too high for lenders’ comfort, you’ll need to lower your debt increase your income, or both. Since changing jobs or demanding a raise mid-mortgage application may not be practical, you may want to focus on paying down debt.
There are differing opinions about the best way to tackle the job. Some experts recommend paying off your smallest debt first — which research has shown can be effective. Some say it’s better to start with the highest-interest loans — that way you pay less interest over the long term. Still, others say that paying down your debt with the biggest monthly bill is the best way to lower your DTI quickly.
Whichever way you decide to go, keep in mind that the goal is to lower the amount of debt you have as a percentage of your income, so choose a method that you can commit to and that effectively moves you in that direction.
Tips for choosing a home you can afford
It may take a while for you to save for a down payment, lower your DTI ratio, or improve your credit scores. But if you work hard and stick with it over time, you may begin to see some rewards, like easier loan approval and better loan terms.
In the meantime, here are some things to consider as you think about what home you’d like once your finances are ready.
Set a budget
To figure out how much you can afford, consider getting preapproved for a mortgage. But when you do, remember that the lender is making a mostly mathematical calculation and not taking into account your comfort level or preferences. Make sure you’re comfortable with the amount you plan to borrow, even if the lender says you can borrow more.
Your mortgage payment isn’t the only expense you’re responsible for.
Narrow down location and neighborhood
Before you begin looking for a home, take some time to think about the type of environment you want to live in — city, suburbs or rural.
Next, narrow your search to a few neighborhoods. Here are some things to consider.
Safety — Some websites offer crime statistics by area. If you’re especially concerned about crime, check with the local police department.
School district — Houses in good school districts typically have higher property values. Look up ratings of schools in the area. But don’t rely on ratings alone. Check out online reviews or talk to parents who send their children to local schools.
Activities — Find out whether there’s a park nearby. Can you get to hiking trails quickly? What about playgrounds, pools or playing fields?
Convenience — Do a test run of your morning commute and check the drive time to the local grocery store. Time spent on the bus or driving to the store adds up and will affect how you spend your time when you move into your new home.
Type of home and other considerations
You’ve got the location and neighborhoods. But what type of home do you want — single-family, townhouse, condo or apartment? Here are some other considerations.
Condition — Move-in ready or fixer-upper? Consider how much you’re spending, whether you’re handy or hate the sight of a screwdriver, and how long you’re willing to wait to move in.
Resale — If you’re planning to stay in your home for a shorter time period, resale value will be more important than if you’re planning to stay long-term.
Other features — Central air conditioning, swimming pool, garage, granite countertops, hardwood floors, walk-in closets. Have some fun figuring out what you can and can’t live without — and how much it will cost you.
Downtown Newman where all the quaint Homes line both sides of the street. Downtown Shopping is around the corner. Almost 920sf home with 2 Bedrooms and 1 Full bath. The home is in need of some TLC and Repairs. A good-sized lot, a very Nice Floor Plan, and Could be A Great Setup.
Custom Home in Hilmar!! On A Court with RV Access. Almost 2000sf with 3 Bedrooms, Office, and 3 Full Baths. Two Story Home with a Master Bedroom Downstairs. Remodeled Kitchen, Remodeled Master Bathroom, Newer Cabinets, Newer Flooring, Newer Paint, Newer Appliances, and More. A Very Nice Family Floor Plan with a Big Patio Area and Backyard. Great Lot to Entertain.
This Has it All…North Turlock Home!! This Home has a Loft, 4 Bedrooms, Pool, Huge Metal Detached Patio, 3 Car Garage with Drive Through. High Vaulted Ceilings and an Open Floor Plan. Approx. 2340sf Semi-Custom Home with a Remodeled Kitchen that features New Cabinetry, Quartz Counters, Tile Backsplash, New Appliances, and with a Pantry Closet. New Laminate Flooring Throughout with Fireplace in Family Area. There is a Full Bedroom and Full Bath Downstairs. Upstairs has the large Loft for Additional Living Spaces. Master Bedroom has Vaulted Ceilings with Tub, Shower, Double Sinks, and a Large Walk-in closet. Downstairs Laundry Room with Sink. 3 Car Garage currently has a bonus storage room. Minutes from all schools including Pitman High and Stanislaus State.
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You never know when your home might get damaged in a flood, fire or other disaster. And you can’t rule out the possibility of a home break-in, either. Ideally, you’ll have homeowners or renters insurance in place to cover your damaged or stolen items. But it’s best to have an extensive list of your belongings before they’re damaged or stolen. That’s where a home inventory comes in.
What Is a Home Inventory?
A home inventory is a comprehensive list of your personal belongings, along with their monetary value. While you don’t have to list every single item you own as part of your inventory, you should include all items of significant value.
Why Do You Need a Home Inventory?
Your insurance company may not require you to have a home inventory, but it’s a helpful thing to have nonetheless. If your home is subject to damage or a break-in, the last thing you’ll want to have to do after the fact is rack your brain trying to figure out which items of yours were impacted. With a home inventory, you will have an easier time getting at that information. That could, in turn, make it easier to file a claim against your insurance policy, and also, get paid on your claim much sooner.
Furthermore, if your home is damaged in the course of a major storm, you may be eligible for local or federal assistance. Having a record of your damaged goods could help you quality for the maximum amount of aid and help you move forward more quickly.
“Having a loss in your home can be very stressful,” says Jennifer Brault, AVP, Claims Property Personal Lines at Nationwide. “This is a good way to restore and put your life back together faster during that time.”
Plus, according to Pat Howard, a licensed property and casualty insurance expert at Policygenius, “A home inventory also helps ensure you’re purchasing the right amount of home or renters insurance coverage and accounting for items that require additional coverage, like an art collection.”
What Should Be Included in a Home Inventory?
Your home inventory should include everything you own of substantial value. There’s no specific threshold for what that entails, but generally speaking, you don’t want to list every $20 item you own, but you may want to list items costing $100 or more.
Some of the items you may want to list include:
Jewelry
Higher-end apparel
Handbags
Kitchenware
Footwear
Electronics
Small appliances
Musical instruments
Furniture
Home décor and artwork
Once you narrow down your list of items to include, you should record each item’s:
Purchase date
Description
Estimated value
If you have receipts documenting your purchases, it pays to retain them. Brault adds that capturing items’ brands and serial numbers can be especially helpful when it comes to electronics.
How to Do a Home Inventory
The first step in conducting a home inventory is deciding how you want to keep a record of your belongings. Here are some options to consider:
A written inventory. Using a notebook or spreadsheet, you can create a comprehensive list of the items you own, along with details such as purchase date and value.
A digital inventory. There are a host of home inventory apps you can use to compile your data digitally. Many of these are free, though some limit you to a certain number of items before imposing a fee. Last year, the National Association of Insurance Commissioners introduced its own home inventory app. Sortly offers a free inventory app up to 100 entries, but if you want to take a more extensive inventory, you pay. Then there’s the UPHelp Home Inventory app from United Policyholders.
With a home inventory app, you typically take photos of your belongings and put them into categories. If you’d rather not use a home inventory app (or pay for one), you can take photos or videos of your belongings yourself. From there, you can add captions or edits to include details about each item, such as when it was purchased and how much it cost.
Once you decide how you’ll conduct your home inventory, your next step is doing the actual work. To that end, a good bet is to tackle your home room by room until you’ve covered all items of value. Don’t forget to check your shed, garage and attic for items you may want to include.
You should also account for items being stored outside of your home. “If you have items in a self-storage unit, make sure to include them, as they are usually covered under your home insurance policy,” says Amy Harris, State Farm spokesperson.
Now if you’re in the process of moving, you find it easier to conduct your inventory then. “The best time to tackle a home inventory is during a move,” insists Howard, “as you can make a list of everything as you pack up or unpack in your new abode. But ultimately there is no bad time to make a list of everything you own — as long as you’re doing so in advance of a loss.”
Where to Store Your Home Inventory
It’s important to keep your home inventory someplace safe and easily accessible. If you have a written inventory, make sure to scan and email yourself a copy and store it digitally in the cloud. You can keep a hard copy in a fire-proof home safe or a safe deposit box, if you rent one. You may even want to send a copy to your insurance company.
If you have a digital inventory, don’t just keep a copy on your phone or laptop. If those items are damaged, you’ll be out of luck. Instead, email yourself a copy and store one digitally in the cloud as backup.
How Often Should You Update Your Home Inventory?
Any time you acquire an item of value, be sure to update your home inventory. The goal is to have a comprehensive list of what you own, so it pays to get into the habit of updating your inventory as you go.
$10,395,000 – 75.95 Acres of Prime Real Estate Along Highway 33 where the High Traffic Zone on Highway 33 and Interstate 5 meet. This Location has been expanding and growing at a Fast Pace. This property has a Good Ag Well which would contribute to the development of this property. This Property is also in the San Luis Water District for Farming Purposes. Here’s your opportunity to have a large stake in this Claim. It’s Triple Zoned: Zoned C-2 (General Commercial) along highway 33 (Santa Nella Blvd). The Southeast corner is Zoned R-4, and Northeast corner is Zoned R-3. Currently Farmed, Leveled, and Ready for Your Project.
Exterior Details
Lot Size Acres: 75.9500
Topography: Agricultural Leveled
Zoning Description: Commercial, Multi-Residential, See Remarks, Other
Community Information
APN: 070-100-011-000
County: Merced
Cross Street: Plaza and Fahey
Water Source: Agricultural Well, Irrigation District
School Details
Elementary School District: Gustine Unified
Middle or Junior School District: Gustine Unified
School District (County): Merced
Senior High School District: Gustine Unified
Property Information From MLS Data
# of Lots: 0
Commission To Buyer Broker: 2.5
Commission Type: %
Crops: Row Crops
Development Status: Raw Land, Farm Land
Directions to Property: On Highway 33 (Santa Nella Blvd). Just South Of Fahey, East side of Highway 33. This property is Just North of Interstate 5 and Highway 33 interchange.
Here’s a piece of good news for rate-weary buyers: Relief is on the way. After months of turmoil, the housing market should be slightly calmer in 2024.
Although the factors that tanked affordability in 2023 — mainly high mortgage rates and lack of inventory — will still be at play in 2024, no one expects conditions to get any worse for buyers and sellers. In fact, many housing experts believe the new year will be a turning point for real estate: They say home sales should (somewhat) rebound, mortgage rates and prices should move lower, and more sellers will list their homes.
To be sure, these improvements will be gradual, and “housing affordability is still going to be the No. 1 issue for homebuyers,” says Danielle Hale, chief economist at Realtor.com. But slightly lower mortgage rates and prices will help lower the costs of homeownership.
What else can we expect from the 2024 housing market? Here’s what experts predict will happen with mortgage rates, inventory, home prices, and sales in the near future.
Mortgage rates will decrease
Mortgage rates were one of the main obstacles for homebuyers in 2023. After starting the year on a downswing, they quickly turned tail and headed up to two-decade highs, even flirting with 8% at one point.
But rates have eased lower in the last two months. A slowing economy, weakening labor market, and steady improvement in the battle against inflation led the Federal Reserve to hold the federal funds rate steady over the past few months and signal the possibility of rate cuts in 2024.
As a result, 10-year Treasury yields and the mortgage rates that follow their movement have dropped. Freddie Mac’s 30-year fixed-rate loan averaged below 7% for the first time since mid-August, and all the experts Money spoke to agree the downward trend will continue in the new year (although it’s not guaranteed).
However, don’t expect a dramatic drop into the 3% or 4% range. As with home sales, there’s a wide range of predictions for how low rates will go.
On the higher end, listing site Zillow expects interest rates to stay between 7% and 7.5% throughout the year. The National Association of Realtors is a little more optimistic, expecting rates to average below 7% by the start of the upcoming spring buying season and end the year at around 6.3%. In contrast, Realtor.com expects rates to end 2024 averaging 6.5%. With mortgage rates averaging 6.61% and trending lower at the end of December, it’s looking good for rates to stay below 7% this year.
Inventory will increase
Last year, sellers were loath to list their homes because they didn’t want to give up the low mortgage rates they’d previously locked in. As a result, there weren’t a lot of homes to choose from in 2023.
Thankfully, buyers can expect to see some improvement in the number of homes up for sale in 2024. Overall, inventory could increase by as much as 30% compared to last year, according to Lawrence Yun, chief economist at NAR, with some markets seeing even faster growth.
Skylar Olsen, chief economist at Zillow, says she has noticed in recent research that some homeowners who bought when rates were in the 5% and 6% range have readjusted their expectations around how low rates will go. They “are much less sensitive” to the rate-lock effect, Olsen says, adding that the rate homeowners consider “low enough” to prompt them to sell is increasing.
Home prices will likely stay flat
While there should be some improvement in housing supply and mortgage rates, the dynamics that have kept home prices high will continue.
Inventory is still well below demand. Before the pandemic, the number of active listings on the market averaged over 1 million homes, according to the St. Louis Fed. At the end of November, there were 754,846.
What does this mean for the market? Buyers are competing for fewer available homes, keeping upward pressure on home prices. So, on a national level, prices aren’t going to plummet unless we get a sudden and large influx of listings. Most experts forecast home prices will remain flat or decrease by about 1% in 2024.
That doesn’t mean there won’t be some markets where home prices majorly decline. There are currently a handful of cities where prices have decreased significantly, such as San Francisco and Las Vegas, and there’s a probability more cities will see considerably lower prices — just not on a level that could jeopardize the housing market as a whole.
Home sales will increase
Most housing analysts expect sales to improve this year thanks to improving overall market conditions. But not everyone agrees just how much better it will be.
The most conservative estimate for home sales comes from Realtor.com, which forecasts existing home sales to increase by 0.1% year-over-year, or a jump of about 4 million homes sold. At the opposite end of the spectrum is NAR, which is forecasting sales to increase by 13.5% compared to 2023.
It all goes back to — you guessed it — the hope that mortgage rates will continue to edge lower, which Yun says “will bring out more buyers and may even nudge some sellers to list their homes.”
Source: money.com ~ By: Leslie Cook ~ Image: Canva Pro
Congrats! You just sold your home quickly for thousands of dollars over the asking price. You may be eyeing that sell price with wide eyes, amazed that a large amount of money will soon be in your bank account.
Well, the cash will get to your savings account, but perhaps not as quickly as you hoped—or expected.
After all, buying a property is a complex transaction. And getting the money from the buyer’s bank to yours involves a multitude of steps that safeguard both parties.
So just how does that sweet offer turn into your cold, hard cash? Follow the money with us from offer to closing.
When homebuyers pay the earnest money deposit
Good news: The buyers usually make a payment—known as earnest money—of between 1% to 5% of the purchase price of the home within three days of an offer.
The buyers part with this money to show the seller they are committed to buying the property, and to prove they can back up their offer with money. The seller then takes the property off the market. And this first payment will be put toward the total cost of the home.
But that moola won’t get deposited into your vacation fund just yet. Rather, it’s held by a third party—such as an escrow company, a real estate firm, or a lawyer—until closing day. This third party holds the payment until the contract is finalized.
That way, if anything goes wrong from the contract to the inspection, the neutral party can fairly distribute the earnest money—usually back to the buyers.
However, if the buyers flake, cancel the sale for no legitimate reason, or miss key dates in the contract, the seller may have the right to keep the money.
When home sellers receive the down payment
OK, so the earnest deposit is a nice chunk of money out there with your name on it. And soon there’ll be more in the form of a down payment, right?
Not exactly. The point of a down payment is for buyers to prove to the lending institution or bank that they have enough dough to pay back the loan they’re applying for (which will eventually be your money).
“And the buyer isn’t required to turn over the down payment until after a required loan for the real estate transaction is approved by the lender,” says David North, designated broker and owner of Realtrua.com, in Redmond, WA.
Why home sellers must wait to be paid
OK, there is some earnest money in an escrow account somewhere and even more money in the buyer’s account with your name on it. Now what?
You wait.
“In parallel with the lender’s process for approving the buyer’s loan—which usually involves an appraisal—buyers and sellers usually have various obligations described in their purchase and sale agreement,” says North. These may include inspections, repairs, disclosures, and various contingencies. The specific timelines and deadlines depend on your contract.
Meanwhile, a title insurance company investigates whether the property meets the needs and requirements of the buyers and their lender.
The entire closing process can take anywhere from 30 days to three months, but the average time is 50 days. Closing occurs when all of these steps have been completed and the loan is approved.
How home sellers get paid on closing day
Hurrah, it’s payday! Also known as closing day, this is when you will hand over the keys to your former castle and the buyers will hand over a massive chunk of dough.
Here’s how it goes down: The buyers make the remaining down payment—minus earnest money—at closing. This is also when closing costs are paid.
“Once all the payments are made, closing is completed and the title is transferred from the seller to the buyer,” says North.
Immediately after the transaction closes, escrow pays the seller the full purchase price in the form of a cashier’s check or wire transfer—minus any fees, taxes, or real estate commissions, that the seller is required to pay. (See more on wire transfers below.)
In other words, after closing, you will now have an eye-popping amount of money in your possession!
What to know about wire transfers on house payments
If you’re to be paid for your home sale by electronic transfer, the good news is that most of the funds are available within a day. However, in recent years the real estate industry has been plagued with wire fraud.
“If you do go this route, be especially cautious when exchanging wiring instructions,” advises Bob Gordon, a real estate agent for Berkshire Hathaway in Boulder, CO.
Use only secure or encrypted email to trade banking information.
Even better? “Pick up the phone and have a conversation with your title company,” he suggests. As long as you’re aware and practice due diligence, wire fraud can be avoided.
Source: realtor.com ~ By: The Realtor.com Team ~ Image: Canva Pro
