By Mira Ma, CFP®, RFC®
Life can be full of many exciting firsts. Your first steps, your first day at school, your first job, your first love—and maybe even your first house.
Whether you are moving out of your parents’ home for the first time or you want to own a home after renting for a couple of years, buying your first home is a big step and thus can be scary. It’s one of the milestones to becoming a responsible adult; therefore, preparation is a good idea. To make the process smoother, you may find it helpful to work through the following three points before you purchase your first home:
1. Start Clearing Those Debts
Before you apply for a loan to get your new home, it’s a good idea to start clearing some of your debt a few months prior to the time of application. The reason for this is to raise your chances of getting the maximum loan amount from your lender. When you apply for a loan, one of the pre-qualification processes from the lender is to consider your outstanding debts, which they pull from your credit report. Car payments, credit card payments, student loan payments, etc. could reduce how large of a loan you can get from your lender.
2. Check Your FICO Score
Speaking of credit reports, do you know what your FICO score is? Your score is very important as it can be a reflection of your character.
The FICO score is the credit score that most lenders use to determine your credit risk. The score considers both positive and negative information in your credit history, and it reveals to the lender if lending to you is a worthy risk for them to take.
The FICO score ranges between 300 and 850. The higher your score, the better terms you can get. Aim for a score over 720. Lots of debts and late payments will lower your score, which could prevent you from getting a substantial loan from your lender. Therefore, before you apply for a loan to purchase your first house, it’s a good idea to find out your FICO score and do everything you can do to boost it a bit before your application. (For related reading, see: Is My Credit Score Good Enough for a Mortgage?)
3. Save for a Down Payment and Reserves
For you to make your home purchase go more smoothly, you may need more cash than just the down payment. It is advisable to also have about one to two months in total housing expenses in reserves. The idea is that the lender wants to see how capable you are in standing on your own in case of a job loss or other unexpected emergency. Having the extra cash on hand to cover your mortgage payment after you close escrow makes you a stronger borrower.
Purchasing your first home can be exciting and stressful at the same time. By taking the time to diligently apply these tips, you can make the road smoother and bring the joy of owning your first home into realization. (For related reading, see: First-Time Homebuyer’s Guide.)
This article was originally published on Investopedia.
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