Home is where you hang your hat. It’s where the heart is. Hopefully, it’s sweet. It’s also the biggest purchase most people ever make — which means if you’re thinking of buying someday, you’re going to want to go into the process as financially prepared as possible.
First, of course, there’s the question of whether it actually makes the most financial sense for you to rent or buy right now. But if the answer is “buy,” you’re going to want to start thinking about things like saving up a down payment, lowering what’s called your debt-to-income ratio, and boosting your credit score. They’re key to helping you get the house you want — but they can take some time to prepare.
Here’s where to start — and other good steps to take as you get closer to being ready to buy.
1. Start saving (or investing) for a down payment
Traditional financial advice says that you should aim to build up a 20% down payment — so if you wanted to buy a home for $200,000, for example, you’d need $40,000 in cash. That’s the gold standard for a lot of good reasons (and we strongly recommend it if you can swing it). Still, saving up 20% can feel impossible in some markets (looking at you, NYC and San Francisco), and it’s not impossible to get a mortgage with a smaller down payment.
Either way, you’re going to want to save up as much as you can ahead of time so that you can have as big a down payment as possible. If you want to buy in the next year or two, we recommend saving the money in a savings account.
If you have more time, we typically recommend investing instead. If you’re an Ellevest Executive member, your investing goals include one for homebuying that uses live Zillow data to make deposit recommendations specific to the area you’re looking at.
2. Pay down as much debt as you can
Carrying some debt can be a part of building your credit, because building up a record of on-time payments is part of maintaining a good credit score. But your mortgage is likely to be the biggest debt you ever carry, and lenders are going to be looking very closely at how much you owe in debt and how you’ve paid it back in the past.
In particular, mortgage lenders will look at your debt-to-income ratio. That makes sense, because what they want to know is that you’ll have enough money to comfortably pay them back each month without getting underwater. They’ll want all of your debt — credit cards, student loans, car loans, everything — to total in at about 28–36% of your income. (Some lenders may be willing to work with you with a debt-to-income higher than that, but it likely comes with more strings attached. Plus, if you’re in that situation, it may not be the right move for you to take on even more debt and lock yourself into that much in fixed monthly payments right now.)
That’s the other reason that debt and credit come first — you may need to adjust your budget for a while. It may take some time, and you may decide you’re not able to do that just yet. You can start with some tips to help you pay down your credit cards and make a budget. I and the other money coaches at Ellevest also host debt and budgeting workshops (free for members via your Learn dashboard) and 1:1 coaching sessions that can help you get there.
3. Check your score like mortgage lenders do
A good credit score is an essential tool when it comes to homebuying. It will help you get the best interest rates and qualify for certain mortgage opportunities. And it’s one thing that you can’t just jump into — this part takes time. Unless you have amazing credit already, you’ll need to start working on your score six months to a year before you start buying a home.
If your credit score is over 750, you’re in good shape already. But if you’re between 700 and 750, you may not qualify for the best rates, and if your score is under 700, you’ll face challenges getting approved (though you’ll still have options).
In addition to your debt-to-income ratio, lenders will also look at your credit payment history. That means you have to track your credit carefully — even if you feel like you’ve made your payments on time, and even if a free credit report tells you so. One in five people experience a mistake on their credit report, for one thing, and mortgage lenders are looking at different reports than you see on a free site.
I recommend actively tracking your score on myFico.com. You’ll pay a monthly fee, but you’re getting monthly updates on the same scores the lenders see — that is, your scores across the three major reporting companies: Equifax, Transunion, and Experian. Their scores can vary by up to 50 points, which could mean the difference between qualifying and not qualifying for a mortgage, or between a great interest rate vs a not-so-hot one.
4. Dispute any mistakes
Look for any mistakes: charges you never made, debts that belong to an ex or family member, payments you made that are listed as missed things like that. If you have something to dispute … well, let’s just say they don’t make it easy. You’ll have to report the error to each credit bureau separately. (The Federal Trade Commission has a sample dispute letter you can use.)
Disputes show up in the comments on your report, even if they’re listed as “closed.” This can be a problem, because some of the most common federal mortgage programs, like Fannie Mae and Freddie Mac, can’t insure your mortgage if disputes are showing. (FICO leaves disputed debts out of the score, and lenders want the most up-to-date score possible.) So you’ll have to check back to make sure they get fully resolved. If not, you need to request that as well. The bureaus are required to resolve disputes within a 30-day period.
If they can prove the credit issue is real and not disputable, it will stay on your report, but you’ll need to contact the bureaus to get the dispute removed from the comments so you can apply for federally-backed mortgage programs. Removal requests go much more quickly; they usually do it within 72 hours. Here’s the contact info for the three bureaus.
TransUnion Dispute Removal: 800-916-8800. 555 W Adams St, Chicago, IL 60661
Equifax Dispute Removal: 404-885-8300. 1550 Peachtree St, NW, Atlanta, GA 30309
Experian Dispute Removal: 714-830-7000. 475 Anton Blvd., Costa Mesa, CA 92626
5. Check on your payment history
How you’ve paid your debt is also a big deal for mortgage lenders and programs. More than one or two late payments in the last five to seven years will usually shut you out of the best loan terms, and even one missed payment may keep you from being eligible altogether.
If there’s a legit reason your payment was late, you can write a letter of explanation to the bureaus. And if you have come to an agreement with your landlord or your credit card provider about reducing or missing payments during the pandemic, they shouldn’t show up as late — but keep an eye out and write to explain those if they show up.
6. Don’t make any “hard” inquiries or applications
The final thing you’ll want to do with your credit report is to leave it alone. Don’t apply for any loans or new credit cards in the six months before buying a home, don’t ask for your limits to be raised, don’t even get a new phone or utilities if you can help it. Each of these actions triggers a “hard inquiry,” which lasts 1–2 years on your report and can dip your score — lenders want to make sure you’re not applying for credit randomly.
If you really need to seek any credit, you’ll need to write a letter of explanation for it during the mortgage application process. It’s more paperwork for you, but those letters do work most of the time unless there’s not a good reason and you’re just applying for credit willy-nilly. Later on, when you’re looking around for mortgage rates and lenders check your credit, the bureaus will see that you’re “rate shopping” and lump all those hard inquiries together as one inquiry, as long as they happen within a two-week period.
From there, you’ll be ready to jump into the process of choosing and applying for mortgages — which is something we’ve got the breakdown on, too.
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