Buying a home can be the most expensive, confusing and scary process you’ll ever go through. It’s hardly something you dive into overnight.
Even if you’re not ready to put in a bid — or even get preapproved for a mortgage — there are plenty of things you can do to put yourself in a good position when you are ready to pull the trigger.
How to prepare for a home purchase
Compare mortgage lenders
Save as much as you can
Even with the help of a mortgage loan, purchasing a house requires a lot of upfront costs. You’ll have to come up with a down payment and closing costs. At a minimum, a down payment requirement is usually 3% to 5% of the purchase price (although there are no down payment loans), and closing costs can run an additional 3% to 6% of the purchase price. On top of that, it’s a good idea to set aside money for moving expenses and build up your emergency fund to handle the surprise repairs that come with homeownership.
When saving for a home purchase, you’ll typically want to put it somewhere it will earn a healthy return, avoid volatility and be accessible in an emergency. Some High-yield savings accounts have APYs of over 4%, and your money isn’t locked up like it is in a CD. A Western Alliance Bank High-Yield Savings Account has an uncommonly high yield and no monthly fees. There’s no cap on how much your balance can earn the high yield and the balance minimum couldn’t be lower.
Western Alliance Bank High-Yield Savings Account
Western Alliance Bank is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
Up to 6 transactions each month
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Excessive transactions fee
The bank may charge fees for non-sufficient funds
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Growing your savings doesn’t just help with upfront costs, it can make you more attractive to lenders.
Deal with debt
Depending on your situation, it could make sense to consolidate your debt, by trading multiple credit card bills with high interest rates into one monthly payment with a lower rate. Upstart and Upgrade are two of CNBC’s top debt consolidation loan providers — both approve borrowers with fair credit (a FICO score between 580 and 669) and have flexible repayment schedules.
Upstart Personal Loans
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Annual Percentage Rate (APR)
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Loan purpose
Debt consolidation, credit card refinancing, wedding, moving or medical
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Loan amounts
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Terms
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Credit needed
FICO or Vantage score of 300 (but will accept applicants whose credit history is so insufficient they don’t have a credit score)
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Origination fee
0% to 12% of the target amount
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Early payoff penalty
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Late fee
The greater of 5% of monthly past due amount or $15
Upgrade Personal Loans
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Annual Percentage Rate (APR)
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Loan purpose
Debt consolidation/refinancing, home improvement, major purchase
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Loan amounts
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Terms
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Credit needed
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Origination fee
1.85% to 9.99%, deducted from loan proceeds
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Early payoff penalty
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Late fee
Up to $10 (with 15-day grace period)
Look at your credit
One of the best ways to lower your mortgage interest rate is to improve your credit score. For certain types of mortgages, having a higher credit score can lower your mortgage insurance payment (if you’re required to have it). Even if you feel like you’re not saving fast enough, raising your credit will bring your homeownership dreams closer to reality because you’ll have to spend less on monthly mortgage payments.
Start by reviewing your credit reports and disputing any errors, which can hurt your credit score. You could use a service like Experian Boost™* or eCredable Lift® to add additional activity to certain credit reports, such as utilities, rent or insurance premium payments. Keep in mind, that not all lenders will take scores improved by these tools into account. Also, Experian Boost only affects your Experian credit report and eCredable Lift affects your TransUnion report. It’s also possible to lower your credit with eCredable if you add accounts with a negative payment history.
Experian Boost™
On Experian’s secure site
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Cost
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Average credit score increase
13 points, though results vary
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Credit report affected
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Credit scoring model used
Results will vary. See website for details.
The FICO scoring model, used in most lending decisions in the U.S., is based on factors such as on-time payments, the average age of your accounts, your credit mix and your credit utilization ratio. The FICO Scores most commonly used by mortgage lenders heavily rely on your payment history and the total amount you owe to generate your score. So chipping away at your debt and paying bills on time is crucial.
For a conventional mortgage, lenders typically want to see a score of 620, though you may get approved for an FHA loan or other government-backed loan with a score in the 500s. Don’t just aim for the minimum, though — a higher score will get you a more attractive interest rate.
Learn about the process
To learn the basics of home buying, meet with a housing counselor approved by the U.S. Department of Housing and Urban Development. They can help you understand industry jargon and walk you through the mortgage application and home purchase processes. They can also point you toward homebuyer assistance programs, which help with down payment and closing costs in the form of grants, no-interest loans and forgivable loans.
It’s also important to learn about the housing market where you want to live. Local real estate professionals, like an agent or mortgage lender, can get you up to speed on the rules and norms in your area. This knowledge could give you an edge in finding opportunities or avoiding costly mistakes.
Your biggest upfront expenses will be your down payment and closing costs, so you’ll want to understand your options. Getting a mortgage preapproval letter will give you an idea of how much house you can afford and make you more desirable to sellers. Be sure to talk to multiple lenders, since the types of loans they offer and their rates and fees vary. Some mortgage lenders may work with specific first-time homebuyer assistance programs.
FAQs
What’s the best way to build credit?
The best way to build credit is to consistently pay your bills on time and to keep the debt you have to a minimum. This is because credit scores are heavily based on your payment history and total debt.
Is it easy to get pre-approved for a mortgage?
Getting pre-approved for a mortgage requires a hard credit check and you’ll need to provide documentation so the lender can verify your finances. If you just want a quick estimate of how much you can borrow, go through a pre-qualification process, which is less rigorous and only requires a soft credit inquiry.
What credit score do mortgage lenders use?
Mortgage lenders typically use FICO and Vantage credit scoring models, though this can vary depending on the type of loan.
Bottom line
Even if you can’t find a home you want at a price you can afford right now, there are steps to get you closer to becoming a homeowner. Saving money and paying down debt are important, but building your credit score and educating yourself can be just as valuable.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every real estate article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
