Buyers should take care of these six financial prerequisites before showing up to an open house with an offer.
(NewsNation) — Purchasing a house can be stressful, especially for those who are unprepared.
According to the real estate site Redfin, a growing number of homebuyers are skipping the mortgage process and paying cash. Nearly 32% of homebuyers paid cash for a home in 2022.
For those who don’t have the luxury of buying with cash, the need for advanced preparation becomes all the more urgent.
Investopedia recommends buyers take care of these six financial prerequisites before showing up to an open house:
1. Down Payment
A down payment, a percentage of the home’s purchase price, is paid upfront to offset the amount you need to borrow.
Ideally, you would have saved up about 20% to get the best rate available and to skip private mortgage insurance, according to Investopedia.
“Lenders have tightened the requirements since the economic crisis in 2008,” Karen R. Jenkins, president and CEO of KRJ Consulting, told Investopedia. “As a result, prospective borrowers seeking to purchase a home must have some ‘skin in the game’ to qualify for a home.”
2. Picking a Lender
Spend time shopping around for a lender. Investopedia recommends first checking with your own bank, which may offer a better rate because of the existing relationship.
Before meeting with a lender, use a mortgage calculator to compare rates, allowing you to see what your real costs might be depending on different rates.
3. Credit Score
A FICO score, which is based on information in your credit reports, indicates to lenders how likely people are to repay the money they borrow.
Higher credit scores lead to better interest rates for homebuyers. Investopedia warns that it will be difficult to qualify with a bad score or, worse, no credit history at all.
4. Debt-to-Income Ratio
Debt-to-income ratio (DTI) is essentially all of your monthly debt payments divided by your gross monthly income, meaning the percentage of the gross income used to pay down debt and interest. Meeting mortgage requirements is easier based on how low the number is.
5. Closing Costs
Be prepared to set aside closing costs, which are fees buyers must pay when closing on their new house. On average, they run from 2% to 5% of the home’s purchase price.
6. Mortgage Pre-Approval
Applying to be pre-approved for a mortgage requires buyers to submit several financial documents that prove their ability to pay off a mortgage.
Generally, the required documentation includes pay stubs, tax returns, bank statements, W2 forms and employment verifications. You can get a checklist from your lender.
Pre-approval is generally quick and can save buyers time in the long run.