The Latest From Greg W. Anderson, Fort Collins, Colorado Financial Advisor
By Greg Anderson
Buying a new home is an enormous undertaking, and it's important to get your finances in shape before you begin. Balanced Financial Incorporated invites you to follow these tips for managing your money while preparing for your future.
Know What Lenders Look For
When you apply for a home loan, all lenders look at essentially the same things: your credit score, proof of income, and debt-to-income ratio. These will be the things that determine your ability to get a loan and your loan rate should you get approved.
According to Equifax, your credit score is drawn from a number of factors, including debt, payment history, length of credit history, and available credit. You can get your full credit report for free using an online service. Your proof of income demonstrates your ability to pay your loan. Creditors want two years of work history, though some lenders will accept fewer.
Your debt-to-income ratio is calculated by using your income and your monthly debts. You can easily calculate your DTI using an online calculator. Lenders look for a DTI of 43 percent or less, so take that into consideration when assessing how to pay down debts.
Pay Down Debt
Once you know your numbers, decide which debts need to be paid down first. If one is putting your DTI over an acceptable number, focus on eliminating it as soon as possible. Otherwise, consider using the snowball method, an efficient way of paying off what you owe.
With the snowball method, you pay off your debts one at a time. While paying the minimum payments on your larger accounts, you focus first on paying off your lowest debt entirely. Then, once you've paid it off, you combine the money you would have paid on it toward the next smallest debt and so on until you've snowballed your way into debt-free living.
Know Your Expenses
Buying a home comes with certain expenses, the most notable being your down payment and closing costs. Down payments depend on the cost of your home and the down payment required for your loan. It's important to research homes in the area and mortgage down payment requirements to get an idea of how much you should save. For example, in Fort Collins, homes are selling for approximately $478,000.
Many loans will let you pay less than 20 percent down on your home, with some such as USDA requiring no down payment at all. You may have to pay private mortgage insurance if you choose to pay a smaller down payment upfront.
While closing costs are a little more difficult to narrow down, you can use an online calculator to get an idea of what your closing costs might be.
Don't Neglect Your Future
Although your priority right now is purchasing your home, it's important not to achieve it at the expense of your future ability to live a full and comfortable life. Borrowing from your retirement for a down payment, for instance, is a risky move. Engage a professional, such as the experienced team at Balanced Financial Incorporated, to help you manage your money so you don't make a misstep that could cost you your future comfort.
Prepare for your home purchase by knowing where you stand and working to improve it intelligently and quickly. With the right moves, you can land the loan you want at the rate you desire without sacrificing your retirement funds.
Balanced Financial Incorporated strives to provide families and businesses with innovative financial solutions. Call us today at (970) 204-1500 to learn more about how we can help you.