Holiday Wishlist: A Brand-New Home

It’s that time of the year again. The giving season. But why not give something special to yourself as the calendar gets ready to turn to the new year? If you’re in the market for a new home, or you haven’t made any significant progress in your search yet, use this article to put yourself on the right track to realizing your homeownership dreams. Because truthfully, those dreams aren’t far out of reach if you know how and what to prepare before filling out a mortgage application.

Most people would like to skip the numbers and get right to the fun part. That is, putting together a wish list of the features you’re looking for in your prospective new home. But your first course of action should be figuring out how much money you have available each month.

Prepping Your Funds

First things first, make sure your current cash flow won’t shrink any time soon, and then figure out how much you can reasonably put toward your mortgage each month. After applying for a mortgage, the underwriter will ask for proof of stable employment. This is a way of making sure you’ll be able to reliably make your payments each month.

You’ll also want to ensure you don’t have any upcoming major purchases that could have an impact on your financial situation, such as buying a vehicle or taking out any other loans.

Credit Score

Once you’re confident your job and financial situation are solid, you should check to see where your credit currently stands. You can get a free copy of your credit report once a year from each of these three credit bureaus: TransUnion, Equifax, and Experian. Their reports can help you spot trouble areas like collections and late payments.

However, the reports don’t include your credit score. There are many services available that offer help specific to you, but there are many different scoring systems as well. Most mortgage lenders use FICO® scores. You can get your FICO scores (you have three!) for a fee by contacting the credit bureaus, or if you’re lucky, your bank or credit card company may provide them for free.

If your credit score is too low, a lender may see you as too much of a risk. Some factors that contribute to your credit score include:

• Payment history

• Outstanding balances

• Length of credit history

• Number of credit inquiries

Every loan type has a minimum credit score for lending. For example, as of December 2021, Fannie Mae’s minimum score for a conventional loan is 620, and the lowest score you can have to still receive a VA loan is 580. You can learn how credit is calculated and ways to improve your score with one of our other articles.

The Exact Numbers

After everything mentioned above is accounted for, it’s time to start working with the real numbers. Use a debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk. to learn how much of your money goes to your debt each month. You’ll also learn how much you can soundly spend on your mortgage. To calculate your DTI ratio:

• Add all your monthly bills, loans, and debts together

• Exclude living expenses, such as groceries, utilities, or gas

• Divide that number by your annual income before taxes

The smaller the percentage, the more loan for which you’ll likely pre-qualify. Your lender will analyze your DTI and consider a few other factors, like late payments, delinquencies, and hefty balances on your credit cards. Regardless, your calculation will give you a good idea of your remaining income and how much you can afford each month on your mortgage.

Expert Tip

Don’t forget, in addition to your new home’s mortgage, you might have to make a down payment and pay closing costs upfront.

Home Wish List

As promised, the exciting process of selecting what you want in your new home starts after you know what you can afford.

How Much Space?

First, how many bedrooms will your new house need? If you have children, will they each get their own space, or do you plan on them sharing a room? And if you plan on having another or your first child within the coming years, you might also need a room that serves as a nursery.

Along the same lines, you’ll need to decide details about other rooms that fulfill your family’s needs. The number of bathrooms and the size of the kitchen are elements to consider. If you dine out a lot, perhaps a smaller kitchen is the way to go. However, to save money for your mortgage payments, you could cut back on fast food and restaurant meals and invest in a larger kitchen.

You might also want to think about where you will sit down and eat your meals. You could plan on having a table in the kitchen, or do you want a dining room solely dedicated to, well, dining?

The Location

What city do you want your dream home to be in? Is there a neighborhood you had in mind? How close do you want your property to be from landmark locations, such as parks or entertainment venues? Do you want your child to attend a school in a specific district? Is a large front- or backyard important to you? These are just a few of the questions you’ll want to ponder when determining what kind of home you’re looking for.

Saving Money

It wouldn’t hurt to incorporate a few money-saving features into your new home wish list. For instance, you could seek out a home with lots of windows. That way, you’ll save on your electric bill by relying on natural light during the days. Additionally, you could check the listings of homes that already include some of your preferences. It’s a plus if the home that checks a few things off your wish list comes with an energy-efficient refrigerator.

So, there you have it. In honor of the holiday season, don’t forget to treat yourself to something nice in the new year. And if something nice is finally contacting a mortgage banker to discuss your loan options, remember to do the prep work behind the scenes before what could be a life-changing meeting.