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Is it just us, or does the longer daylight stir up the desire in you to spring clean your home, too?
That refreshing sense of new beginnings isn't just for your physical space; it's the perfect time to give your finances a thorough checkup, especially if applying for a home loan is part of your spring plans.
1. Start with Your Credit
Think of your credit score as the front door to your financial house. It's the first thing lenders will notice. Just like fresh paint can make a door more inviting, a polished credit score can be more welcoming to lenders. The best way to start improving your score is to review your credit report.
How to access your free credit report
Free copies of your credit reports are available from any of the three major credit reporting bureaus. You can request your credit report from Equifax, Experian or TransUnion through annualcreditreport.com. Members can also enroll in My Credit Score, Meritus Credit Union's free credit monitoring tool to stay up to date.
While reviewing your report, did you spot a mistake? Dispute it. Notice high balances on your credit cards? Start paying those down. These steps can help boost your credit score and make the home buying process smoother.
2. Tackling Your Debt
While we're on the subject of paying down high balances, let's talk about debt-to-income ratio and decluttering your debt.
What is debt-to-income ratio?
Your debt-to-income ratio is the percentage of your income that goes towards paying your debts each month, a key factor lenders use to decide if you can afford a new home loan.
Think of it like the clutter in your financial house. Too much clutter, and it's hard to move around—too much debt, and lenders might not think you have room for a mortgage. A good debt-to-income ratio is below 43%, with lenders preferring a ratio of 36% or less. Paying down debts, especially those with higher interest rates, can really open up your financial space, making room for new possibilities!
3. Saving Up
Now, onto the attic of our financial house—the savings. We all know attics can hold surprises, and so can the process of buying a home. That's why having money in savings is crucial. Not just for the down payment, but for everything from closing costs to unexpected repairs.
Saving for the Down Payment
Another thing to save for: The down payment. It's the solid foundation you need before you start building your dream of homeownership. The down payment amount varies due to a variety of factors, including the loan type, the home purchase price and more. Whether it's 3% or 20%, start saving money to apply to the down payment.
4. Don't Forget the Closing Costs
As a rule of thumb, a savings fund should hold at least 3-6% of the loan amount to cover closing costs. This upfront expense, typically paid at the closing table, can include origination fees, annual property taxes, title insurance and more.
Along with closing costs, it's a great idea to save at least 3-6 months of living expenses to ensure you're prepared for anything your new home may throw at you.
5. Avoid Other Large Purchases
Just like you wouldn't start a major home renovation right before your spring cleaning, you'll want to avoid big financial changes before buying a house. Taking on new debt, such as a new car or vacation loan, has potential to significantly affect your credit score. To be safe, avoid any other large purchases until after you've closed on your home purchase.
So, as the days grow longer and you feel that familiar urge to refresh and renew, don't forget to include your finances in your spring cleaning plans. A little effort now can lead to a smoother home-buying experience. And just like the satisfaction of a clean and organized home, the peace of mind that comes with financial readiness is its own reward.
Your credit union is here to support you when you're ready to buy a home. Visit merituscu.net/loans for more information. Happy house hunting!
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