For those considering a purchase of a new home in 2017, there are steps you can take to prepare yourself financially. The first step is to contact a local mortgage broker that can help review your current financial situation—but the two most important aspects to define are your credit score and your debt to income ratio.
Your mortgage broker can help you by pulling your credit score and giving you advice on what steps you can take to improve your credit score, if needed. Most lenders want a score of 640 or higher to approve you for a home loan, but knowing your credit score is also important if you are borderline to receive the best interest rate available. Usually a score at or above 700 is needed to gain the best interest rate. Sometimes there are mistakes on credit reports that can be cleared up, but clearing them up takes time, so reviewing your credit report ahead of time is essential.
Additionally, mortgage brokers can help review your current debts and prioritize any possible payoffs that will help to improve your debt to income ratio, and in turn, your purchase power. For instance, if you have 3 credit cards and you are carrying balances on all of them, which create a monthly debt of $300, or $100 per card, you could pay off the card with the lowest balance and reduce your monthly debt by $100 a month. But, lenders look negatively at reports that show recent payoffs for credit card balances, so planning ahead to pay off debt is a necessity. Also, do not close any credit card accounts, because capacity to borrow is a big factor in your credit score.
Another important discussion to have with your mortgage broker is a review of your tax returns. In many cases, an average of two years tax returns are needed, especially if you are self-employed. For example: 2015 your adjusted gross income was $30,000 and in 2016 your adjusted gross income is $50,000—then the lender would only be able to qualify you for a purchase based on a $40,000 annual income. In some cases, you may not be happy with the way a prior year’s taxes were filed, and there is a process you can utilize to amend a prior year’s return. However, be sure to consult an accountant/tax professional before making any changes.
“Upfront preparation is key. If you think you are on the fence in any of these categories, get to a lender as soon as possible so we can help plan and make your purchase as smooth as possible,” said Ned Delaney, Branch Manager of 1st Mariner Mortgage in Ocean City.
Lauren Bunting is a licensed Associate Broker with Bunting Realty, Inc. in Berlin, MD.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
