Feb 15, 2021
Buying a new house is no easy task. It takes months, if not years, of financial preparation, a whole lot of research and of course, it is a long term commitment. From your budget to getting a mortgage, there are so many things that you must consider before you even start looking at potential properties. So, whether you’re a first-time buyer or you’re thinking about buying new properties to add to your investment portfolio, here are the three primary financial things that you need to check before you buy a new house in 2021.
Have enough for a down payment
Be it estate agents in Wolverhampton or bank employees in Derby; all the experts agree that you need to have enough money kept aside for your down payment. In order to do this, you first need to figure out exactly how much you can spend on buying your new home comfortably. Once you have a budget in mind, you need to keep aside 20 per cent of that amount as your down payment needs to be handed over at the time of the purchase. Since it is never easy to collect such a large sum of money quickly, you will need to spend a few months putting aside money from your income to collect your down payment. While doing so, don’t forget that you also need to continue to put aside money every month in order to pay off your mortgage loan. So, it is essential to decide a budget based on how much you can keep aside for your down payment and how much money you can spend monthly to pay off your mortgage without burning a hole in your pocket.
Start working on your credit score
If you want to secure a loan in order to buy your new home, you need to start working on your credit score at least 8 to 12 months in advance. Banks and lenders usually look at a person's credit score to decide whether or not that individual is applicable to take out a loan. In order to improve your credit score, you need to make sure that your credit card bills are paid on time, you have no outstanding bills, pay off all your debts and make sure your pending credit card bills are not very high. Also, it is recommended that you close any credit cards that you do not use. By ensuring that you pay your bills on time, you will be able to significantly improve your credit score over a few months. The sooner you start working on your credit score, the more your credit score will improve.
Check out debt to income ratio
Banks use debt to income ratio to check if you can afford to pay back your loan in the given period. Basically, the debt to income ratio can be calculated by adding up all your monthly debt and dividing that sum by your gross monthly income. Your monthly debt includes things like your student loan, your car loan, any outstanding bank loan, credit card bills and so on. You should aim to have a debt to income ratio that is lower than 45 per cent, but the lower, the better. Usually, lenders and banks think twice about giving a loan to someone who has a debt to income ratio higher than 36 per cent! Say, you earn $10,000 every month. The bank will check how much money you are paying every month for your car loan, your credit card bills, your utility bills as well as your other monthly expenditure and will then try to figure out if you have enough money to be able to pay your mortgage based on your debt to income ratio. If your debt to income ratio is too high, it is highly recommended that you work on reducing your debt to income ratio before applying for a mortgage or pre-mortgage approval!