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Don’t rush into a decision to buy a home that you end up regretting.
Key points
- Buying a home means committing to a mortgage payment and other ongoing costs.
- You’ll want to have your financial ducks in a row prior to purchasing.
- If you take care of these tasks, you can be sure you’re ready for homeownership.
If you’re considering purchasing a new home in 2022, you don’t want to jump into the real estate market if you aren’t 100% sure that doing so is a smart financial decision.
To make sure your choice to get on the property ladder is one that ends up paying off for you over the long run, make sure you check these tasks off your to-do-list before you call up a real estate agent.
1. Check your credit report and score
Mortgage lenders consider a few factors when determining whether to approve you for a loan and setting the interest rate they’ll charge you. But your credit history is one of the most important. A good score can mean you qualify for a loan at a competitive rate while a low score may leave you with few choices of lenders and high interest costs.
You’ll want to make sure your credit score is good enough to get at least a reasonable rate since you’ll be paying off this debt for several years, if not decades. This means you’ll have a minimum score of 620 and ideally one closer to 700 or higher. If your score is below this, consider putting off homeownership while you work on improving it.
2. Calculate your debt-to-income ratio
Your debt-to-income ratio (DTI) refers to the level of debt you have relative to your income. Mortgage lenders like your DTI to be below 36% when factoring all of your debt, including your mortgage. And they also like your total housing costs (including mortgage principal, interest, property taxes, and insurance) to be below 28% of income.
If you are above these ratios, you’ll likely have a narrower choice of lenders — if you can borrow at all. Consider working on paying down your debt or increasing your income. Repaying some of your debt can also help give your credit score a boost, as credit utilization ratio (credit used versus credit available) has a big impact on your credit record.
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