If you’re planning to buy a home this year, you’ve hopefully saved up more than you think you’ll need for a down payment. But stockpiling money isn’t the only thing that should be on your financial checklist before becoming a homeowner.
First and foremost, you should check in on your credit score, that’s because, the higher your credit score, the better rate you’ll be able to get on a mortgage. And that matters because even a fraction of a percent can dramatically alter the total you’ll pay over time.
Your goal should be to get the best possible loan. The better your financial profile is, the lower the interest rate you will be offered. Even a small interest rate difference can add up to tens of thousands of dollars in savings over the life of a loan.
FICO credit scores range from 300 to 850 and signify your trustworthiness to financial institutions. While anything over 650 is considered decent, Orman recommends aiming for a score of 740 or higher before applying for a loan.
If your score is lower than 740, please focus on boosting it as much as possible over the next few months. Every 10 or 20 point increase can help your cause. A 700 score might earn you a better offer than a 680 score.
That’s because a high score tells lenders that you have a proven track record of being responsible with your money. It means we’re more likely to want to give you a loan, because we know you’re going to pay us back.
If your score is less than ideal, Orman recommends taking three immediate actions to improve it: pay down credit card balances, pay down other debt, such as student loans, and stop buying anything that isn’t completely necessary.
You want to improve your credit utilization ratio, which is calculated by dividing your balance by your credit limit. Ideally, you’ll never hold a balance of more than 30 percent of your limit. So If you have a card limit of $10,000, you never want your balance to exceed $3,000.
As you get ready to consider putting in an offer on a home, you want to pay down as much debt as possible and refrain from splurging.
The best advice is to charge as little as possible in the months leading up to a home purchase.
You’ll also want to have excess cash on hand that can prove to lenders that you’ll be covered even in the event of an emergency. “Though there is no hard-and-fast rule, lenders want to know that if you get laid off, or sick, you can cover the mortgage for at least a few months,” Orman says.
Emmie Martin, CNBC