Buying A Home: 4 Ways To Plan Ahead

Oct 15, 2024 Buying A Home

Are you working towards homeownership? Prepare to be a first-time homebuyer with these tips.

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It’s never too early to start planning to buy a home – building and repairing credit, paying off debt, saving money, and making ample room in your budget can take time.

Prepare your finances for homeownership by taking proactive measures today.

Ways To Plan Ahead

Lower Credit Utilization

To help assess risk, lenders look at your credit utilization, or how much of your revolving credit you’re currently using. The less debt that’s outstanding, the better your utilization ratio. Generally, using more than 30% of your available credit or nearing your credit limit can hurt your credit score.

This is just one way to show lenders how you manage credit. In addition to maintaining low balances, be sure to pay your bills on time to show lenders that you’re a trusted borrower when it’s time for you apply for a home loan.

Calculate Your Debt-To-Income Ratio

Home loan lenders look at what’s called your front-end and back-end debt-to-income ratios. Your front-end ratio tells you what you can afford in mortgage-related payments each month and should be around 28% or less.

To figure out your front-end ratio, multiply your gross monthly income by 0.28. For example, if your monthly paycheck is $4,000, you should pay a maximum of $1,120 on a mortgage.

Your back-end ratio is your total debt-to-income ratio, including all of your debt, such as a mortgage, credit card minimum payments, student loans, car loans, child support, etc. Most lenders prefer a total debt-to-income ratio below 43%, but this number will vary by lender and loan type.

Increase Your Savings

One way to keep your debt-to-income ratio low and ensure you won’t need to over utilize your credit is to build your savings. Accidents and unexpected necessities are a part of life. No matter how much you plan, you’re inevitably going to need more cash than you budgeted for at some point.

Building up savings is especially important for homeowners, who might need to cover unexpected repairs or find room in the budget for insurance premium hikes, for example.

Also, consider increasing your savings to fund a down payment on your home. The recommended down payment is 20% of the total cost of the home, anything lower than 20% will generally require you to purchase private mortgage insurance which can increase your payments or certain costs during the process.

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High-Yield Savings

Grow your savings with one of our many Share Certificates. Whether you have $10 or $1,000 to save, we have options to help you reach your financial goals.

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Boost Your Credit Score

Your credit score will influence the interest rate you qualify for and the total cost of the loan. Also, blemishes on your credit history can negatively influence your score for years, even if you have resolved them. Clearing up negative marks on your credit report now will help immensely in the future.

A low credit score can keep you from acquiring a loan for a home, a car, furniture, and other things you’ll want and need throughout life. While you want to start establishing credit accounts to build good credit, you also want to be very careful about how you use it.

Next Step

Looking to purchase a home? Not sure where to start? View this First-Time Homebuyer Webinar to learn more.

Membership required. Programs, rates, terms, and conditions are subject to change without notice. Normal lending criteria apply. All loans subject to credit approval. NMLS #405608.