If you’re ready to make the jump from renter to homeowner, you’ll most likely need to save for a down payment. The Even if you’re just window shopping, these 10 steps will help ensure your finances are ready when the right house does come along. down payment on a home is between 3% and 20% of the purchase price. While 56% of buyers with a mortgage put down less than 20%, saving up enough money for a down payment remains a top challenge for buyers across America.
As springtime approaches and the home buying frenzy begins, many people have homeownership on their minds. But buying a home right now might be challenging — a shortage of homes and a highly competitive housing market might mean you’re sitting on the sidelines. Economic uncertainty may have you thinking twice.
Whether you’re gearing up to buy this year, or simply want to get your finances optimized for when you do decide to buy, there are steps you can take now so you’re ready to act when the time comes.
Here are ten things you can do to prepare. Depending on your specific situation, you may be able to skip some of them.
1. Review your credit score
Your credit score plays a vital role in whether or not you get approved for any type of loan, and it’s especially important when trying to take out a home loan. It can also impact the interest rate you qualify for.
You can request a free copy of your credit report from any of the three major credit reporting agencies. Review it carefully and check for discrepancies. Work on improving your score (by paying down credit card debt, for example), and avoid taking out large loans during this time.
Lenders will use your credit score (the most common type is a FICO score), to help determine whether or not you are likely to pay back a loan on time. Even though there’s typically a minimum score required for a loan — around 620 for a conventional loan — lenders will take a closer look at other components in your credit history to help determine your overall creditworthiness. These might include:
- Payment history
- Total debt
- Length of credit history
- New credit
- Type of credit
2. Try to remain consistent
Lenders may see changing jobs or receiving irregular paychecks as a red flag when they review your history. Because they want to ensure you have a consistent source of income, a lapse in your paychecks can be troublesome. If you’re able to stay at the same job, it can help.
3. Regulate your credit card use and new accounts
Lenders generally don’t like to see a frenzy of purchases charged to your credit card when you’re trying to take out a loan. Buying things on credit with late or missed payments is a strong indicator of your payment history, and in a broader perspective, could mean you don’t have enough money to make your monthly mortgage payments.
A major factor that can cause your credit score to fluctuate is your credit card debt. If possible, try to keep your credit card balances at 30 percent or less of your credit limit. Smaller, month-over-month balances can help your credit score as a positive factor of low credit utilization (the percentage of your available credit that you are currently utilizing). Lastly, limit your number of newly opened accounts.
4. Find your price range
Zillow’s Affordability Calculator can help you determine what you can realistically afford to spend on a new home. Just plug in your income, monthly debt and down payment for an estimate.
5. Keep saving
If possible, continue setting money aside for your down payment. The amount can vary: It can be as much as 20% of the purchase price, but it also can be lower with conventional loans or if you qualify for an FHA or VA loan. You’ll also need funds to cover closing costs, moving, and other related expenses.
6. Gather info and advice
Look at homes online to see what’s available in your price range. Think about your must-haves and nice-to-haves so you can focus your search when you’re ready to take the next step. Use these questions to create your new-home wishlist. This is also a good time to reach out to a local agent who can provide helpful neighborhood and market information.
7. Calculate your down payment
A down payment of 20 percent or more is often considered ideal for a home purchase. Buyers who put down less than 20 percent will typically have to pay a premium in the form of private mortgage insurance (PMI). If you’re able to put 20 percent down, you’ll avoid paying that extra premium.
One-fifth (20 percent) of buyers surveyed by Zillow for the 2021 Consumer Housing Trends Report put down 20 percent, with an additional 18 percent of respondents putting down more than 20 percent.
However much you’re able to put down as a down payment, knowing how much you can afford in a monthly mortgage payment is important. You can easily calculate your mortgage and see what your estimated payments will look like and get a sense for how much you should put down.
8. Get the down payment ready
Determining how much you need to put down is the easy part. But figuring out how to fund that down payment is where the challenge arises for many people. Fortunately, there are creative ways to make it work.
In addition to more traditional routes, like saving up the old-fashioned way, some people choose to sell stocks to fund their down payment. If you decide to go this route, make sure you give yourself enough time to sell, and understand if and what amount of capital gains taxes you might have to pay. If you don’t have stocks, or don’t want to sell any assets, you can try picking up a side hustle to earn extra income to save for your down payment.
9. Identify pre-approval materials
A pre-approval letter is usually valid for 60-90 days, so you don’t need it until you’re closer to buying. But make sure you have (or can get) the documents you’ll need, such as tax returns, W2s, pay stubs and bank statements. Lenders may also want to see evidence of your down payment.
If you’re getting help from friends or family and the money isn’t in your account, you may need the funds transferred into your account(s) prior to starting the process of getting pre-approved.
Your lender may also request additional documentation if you receive any money outside your regular job. They’ll also need a complete list of your debts and assets, and they might also ask for IRS Form 4506-T—which verifies the information on your W-2s.
10. Get pre-approved
If you think you’ll be ready to buy in the next 60-90 days, you can start the pre-approval process. A lender can help you determine how much you can afford and get you pre-approved for a loan.
Source: March 8, 2022, zillow.com/resources/stay-informed/waiting-to-buy-how-to-prepare-finances/, All rights reserved.