Make Money From Home

5 Steps Suze Orman Says to Take Before Buying a House – The Motley Fool

Image source: Getty Images

How many of them have you taken?


Image source: Getty Images

How many of them have you taken?

Key points

  • Orman says to focus on credit, debt, and spending before you look for a new home.
  • Skipping these steps can set you up for financial hardship later, or even prevent getting a mortgage.

Before you buy a home, it’s crucial that you’re in a good position to get a mortgage and are prepared to cope with the financial responsibilities of property ownership. It can be hard to know when you’ve met these milestones and you’re ready to call a real estate agent, but finance expert Suze Orman has some advice that can help.

Orman recommends taking these five steps before a home purchase to make sure you can get an affordable mortgage and cover new costs.

1. Improve your credit score

First, Orman suggests working to improve your credit score if it’s below the 740 to 760 range. Borrowers get the best deal on a home loan with a score above this threshold. While you can buy a house with a much lower score — as low as 620 for a conventional loan, or around 500 for government-backed loans — you gain more options with better credentials.

While Orman acknowledges that not everyone can get a credit score to 740 or above by the time they want to become homeowners, she points out that the more improvement you can achieve, the better your mortgage rate is likely to be.

2. Reduce credit card balances

Although Orman says it’s ideal to pay off your card in full each month, many of us end up carrying a balance. Reducing a balance can make a big difference in qualifying for a better home loan.

Her recommendation is to aim for a credit-utilization ratio below 20%. This means using just 20% or less of the total credit available. Following this advice could also help you improve your credit score (utilization rate is an important factor in the scoring formula), and improve your debt-to-income ratio (the ratio of total debt relative to income, which lenders consider).

3. Pay down other debt

Debt-to-income ratio is an important consideration for mortgage lenders — they want to know you aren’t over-committed, and can repay your home loan. Orman says the ideal debt-to-income ratio is below 36%. If you owe more than that, it’s a good idea to pay down debt …….


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