If you have a military move ahead, are you thinking about buying your first house? Standing in the doorway of opportunity, you could be called to respond to the question, Are your accounts ready to go?
As you think about being prepared to buy a home, consider the following.
Build Your Credit
Once a year or so, it’s a good idea to take a look at your credit report. As long as this request is directly from the credit agency, such as obtaining your FICO score from myFICO.com, there should be no fee and your inquiry should not lower your credit score.
When you’re looking at how your numbers stack up, consider these points.
Reviewing your accounts can serve as motivation for you to lower your account balances. Rather than moving your debt from one account to another, work towards paying it off.
If you’re hoping to improve your credit score, take note that closing an account that you don’t use won’t be a quick fix. A closed account will still hang around on your credit report. You could also lose points for trimming back your "credit utilization ratio" or spending limit. However, if that credit card has too high of an interest rate or if it serves as a temptation for impulse spending, then it may be worth the risk to close it out.
Even though you’re trying to build up your credit, it’s not in your best interest to open a bunch of new accounts just to boost your number. Each credit inquiry takes a few points off your score. Also, you probably don’t need more monthly bills to pay.
Keep in mind, the higher your credit score, the lower your monthly mortgage payment can be. Any work you put in towards improving your score will be worth your time and effort.
Save Your Money
Unlike a shopping trip for an everyday purchase, buying a house is a big deal. You’ll need to be financially prepared to take on a very expensive loan. When looking at your bank statement, think realistically about how much money you’ve saved. Having a healthy amount of cash in reserve, you can cover:
- Earnest money: A portion of your down payment that shows a seller you have a strong intent to buy.
- Down payment: A percentage of the cost of the home. Having money to front can help lower your mortgage payment.
- Closing costs: A percentage of the purchase price. Often up for negotiation with the seller.
- Immediate renovations: Maybe you need to repaint? Perhaps you need new carpet? There might be issues you’ll want to address before you move in.
- Emergency fund: Although 3 months’ pay (or more) is recommended, having a cushion of at least one month of take-home pay in your savings will help in a pinch.
It’s important to be confident that the money you’ve saved can cover expenses that occur with a real estate transaction. Otherwise, it’s okay to hold off on buying a house until you have enough funds tucked away. Our post Get Your Savings in Order Before You Buy a Home encourages a potential homebuyer to create a realistic budget. A working budget can serve as a guide for building the balance in your savings account. The more money that you save up, the more prepared you’ll be for entering into homeownership.
Learn More About Your VA Loan Benefit
Since your military family is talking about buying a home, you’re probably familiar with the Veteran’s Affairs (VA) loan. With this type of mortgage, a portion of the principal is guaranteed (insured) by the Department of Veterans Affairs. One of the biggest reasons this loan is appealing is that it has no requirement for a down payment.
Before signing on the dotted line, it’s a good idea to do a little homework on what is and isn’t included in this type of contract. 9 VA Home Loan Facts You May Not Know explains, "Although a VA loan does not require a down payment, borrowers should know this doesn’t mean cash isn’t needed for the transaction."
Even though the terms of this mortgage are more favorable than others, there’s still a need to have a healthy savings account in order to provide cash when requested.
Line Up Your Financing
For a more defined view of how much house you can afford to buy, reach out to your bank or a lending institution to review your records.
A quick check of your accounts will reveal a ballpark figure of what you can afford. This informal process is called Pre-Qualification. With the results of your pre-qualification inquiry, you can decide if you are ready to invest in real estate. If so, then you’ll continue to the next step, which is applying for pre-approval for a mortgage.
Pre-Approval is a much more involved examination of your finances and credit. If you receive a statement of pre-approval, you’ll have a conditional commitment for an exact loan amount. Having pre-approval for a mortgage is ideal when you find the home you’ve been searching for. You can place an offer in a competitive market, knowing you’ll already have your financing lined up.
However, even with mortgage pre-approval, there’s no absolute guarantee for financing. It’s simply your lender’s way of saying they will most likely approve you for a certain amount, if everything checks out with your loan underwriting process.
There’s so much to think about before you dive into homeownership. As What Military Families Should Consider When Making the Decision to Buy or Rent a Home states,
"If you have a healthy cash reserve, have gone through the process of pre-qualification or pre-approval for a mortgage, understand your VA home loan benefit, and have your eyes wide open to the financial responsibilities of owning a home, you may be ready to buy a home."
MilitaryByOwner understands your need to prepare for homeownership. We encourage you to browse the articles, posts, and ebooks we’ve compiled. We’re happy to offer a sense of guidance and support as you find a place of your own.
By Mary Ann Eckberg