It’s never too early to start planning for the future, especially if you want to own a home someday. Building and repairing credit, saving, paying off debt, and making ample room in your budget can take time.
Prepare finances for homeownership by taking proactive measures today.
Lower Credit Utilization
To help asses 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 you’re managing credit responsibly. In addition to maintaining low balances, be sure to pay your bills on time to show lenders that you’re a trusted borrower when you apply for a home loan in the future.
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%. 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 lender 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 ahead, you’re inevitably going to need more cash than you budgeted at some point.
Building up a good nest egg of savings will ensure that you have it when you need it and don’t continue to add to your debt.
Also consider increasing your savings to pay for a down payment on your home. The recommended down payment is 20% of the total cost of the home, anything lower than 20% will require you to purchase private mortgage insurance which can increase your payments or certain costs during the process.
Boost Your Credit Score
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’ll want to start establishing credit accounts to build good credit, you also want to be very careful about how you use it.
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.
Looking to purchase a home? Not sure where to start? View this First-Time Homebuyer Webinar to learn more.
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