Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
A home purchase is not an easy decision to make. You have to consider several factors aside from the actual house you will eventually buy. It’s also not something you can always prepare for because while some people can experience this much further in the future, others have to make this call earlier.
If you do have the benefit of time, though, to take the necessary steps to ensure that you choose all the suitable options, here, we will outline a plan to make your house purchase a breeze in six months or more.
Table of Contents
How to Prepare to Buy a House in 6 Months
The Home Buying Process
Everybody buys houses for different reasons. Therefore, the recommendations put forward here may not necessarily be what’s best for you, depending on your situation. There might be more steps involved, or you may not have to do some of these. It’s up to you to choose which actions are necessary for your timeline based on personal factors.
1 – Save for the down payment and closing costs
You are only truly ready to buy a house when you have put enough away for a down payment. It’s up to you how much house you would like to get, but whatever the price, it is best if you make a down payment of at least twenty percent of the cost.
This is due to private mortgage insurance (PMI). Mortgage lenders will charge you a PMI fee to cover them if you default on your loan to secure their business. To reiterate, this insures the lender, and not you, the borrower. However, this only goes for those who borrow more than 80% of their house’s purchase price. If you make a minimum down payment of 20 percent, you don’t have to pay PMI. Once you already have 20% equity in the home, the logic is that you are now more invested in ensuring you eventually pay in full.
While it is true that there are types of mortgages that will not require you to make a down payment, they are harder to qualify for, and they will mean higher monthly debt payments.
Now, even if you are lucky enough to get approved for a loan that requires zero down payment, there will still be closing costs. These also vary from lender to lender, but they typically range from 3 to 6 percent of the house’s purchase price.
So the first step is figuring out how much you want to save so that you have enough cash reserves for the down payment and closing costs. The second part of this step is to make a game plan so that you can raise this particular amount in time for your purchase.
2 – Check your credit report
The most important part of your mortgage application is your credit score. Whatever the price of your house, your credit score will dictate how much down payment you’re supposed to make and what kind of mortgage loan you will be approved.
Now, it is possible not to have a credit score at all. Credit reporting bureaus calculate your credit score based on your debt payment history. If you’ve never owed money before or never had a credit card, you will probably not have anything in your credit report. So once you think you are financially ready to purchase a home, the next step is to request your credit report.
There are three major credit reporting bureaus: Equifax, Experian, and TransUnion. When you apply, the lender will get your credit scores from all three companies, and they may not report the same credit score under your name. When this happens, the lender throws your top and lowest scores and refers to your middle score for the application. So if you only review your history based on one company’s report, you might be caught unawares if the lender rejects your application.
Make it a point to monitor all three of your credit scores.
3 – Shop around for the best lender
Since you also have the benefit of time, you can use this to your advantage by doing as much research as possible.
A lot of borrowers tend to skip this step in the home buying process. But when you don’t compare and contrast lenders, you don’t open yourself to the myriad of options out there. And when you don’t know the full spectrum of choices, you won’t have any idea whether you’re getting the best deal you could or the worst.
The goal is to get the most value for your money. Just as a serious buyer will make an effort to check out all the homes available in the market, a serious borrower who wants to save cash will look for the best lender with the best terms and rates.
4 – Get a preapproval letter
Once they have chosen the lender they want to work with, it is understandable why some people immediately jump into the house-hunting part of the process. But if you’re going to talk to real estate agents with more confidence, it is ideal to have a preapproval letter in hand.
When someone is already pre-approved, this generally means that the borrower has already submitted most of the requirements. A loan officer has looked over the application and found the borrower agreeable to their company. However, the loan is not yet approved since the lender has not reviewed the house information. Mortgage lenders also need to consider the house you will be borrowing money for before giving you a mortgage loan.
So why are preapproval letters important? House sellers will usually prefer potential buyers who can pay in cash. If a buyer wants to use a mortgage, this buyer is less attractive to the seller. Mortgages take time, which means a longer wait period before closing the deal. In a competitive market, you will need to convince the seller or the real estate agent to choose your offer over other buyers’. When they know that you are already pre-approved for a loan, they gain their confidence and possibly their preference.
Another advantage of a mortgage preapproval is knowing your home-buying budget. You have to make sure you can actually afford the house you are buying.
After the preapproval process, the lender will tell you just how much they are willing to lend you. With this number, you can limit your choices of houses to look for in the market, so you don’t go over the budget. Choose a more expensive place, and you risk the chance of getting rejected.
Please note that preapproval letters are usually only good for a maximum of 120 days. After that, this document expires, so you only have four months to search for a house if you want to use the same preapproval letter.
5 – Buy your dream home
Finally, you can buy a house once you have done these steps.
The house-hunting is undoubtedly the part that everybody looks forward to, and with good reason! You get to imagine your future and see several possibilities each time you step into a house. In addition, you might be able to travel a bit in your search, and you will definitely learn a lot.
Just make sure to enjoy this once-in-a-lifetime ride and make the most out of it. Leave no stone unturned, so you don’t have any regrets.
Mortgage Application Tips
1 – Pay down debt, hustle
Clearly, the more buying power, the cheaper your mortgage. If you think your gross monthly income is not enough to put up the money needed for initial costs and mortgage payments, this is the time for you to reflect on your finances.
Is it time to ask your boss for a raise? Or is it time to look for a different job? What about a side hustle that can boost your income?
Mortgage lenders will also take a look at your debt-to-income ratio or DTI. This is the percentage of your income that goes towards monthly payments for your car, credit cards, or student loans. If you have a high DTI, there is a lesser chance you’ll get approved for a mortgage. If this sounds worrying, don’t panic. You still have time to work on it.
So first, you need to hustle. You need to increase your income to have more buying power. With more cash, you won’t miss any of your monthly payments, and you can pay down as much debt as you can before you apply for a mortgage. More cash and less debt equal a lower DTI.
We’re not saying it will be easy, but with the right attitude and determination, tens of thousands of people have made this work for themselves. You can do this as well!
2 – Boost your credit score
Aside from your income and DTI, your credit score will also need a boost. Whether you are already happy with your score, six months can make a lot of difference for your credit history.
It would be best to avoid opening new credit or loan accounts during this time. Whenever you apply for anything, your credit will take a hit, and each of those points is very precious to you right now.
Once you have your report in hand, you’ll have to put yourself in the shoes of the lender. Ask yourself, “What information in this report puts me in a bad light?” For example, is it that time you missed a payment on your credit card or the fact that you don’t pay in full every month?
Check every line in your credit report for errors, and call up the bureau if you need to have something corrected. That’s your right. If you see no issues, take down notes on areas for improvement and make it a point to pay all your bills in full and on time in the next six months to come.
3 – Talk to a mortgage broker
Many home buyers find the loan application process daunting, and this is perfectly understandable. You have to talk to a real estate agent, a loan officer, and go back and forth several times to fulfill your requirements. On top of that, there is always the chance you won’t get approved, or you won’t get the deal you want.
If you share these anxieties, you can get the help of a mortgage broker. These professionals are experts regarding home loans and lenders. They will already have established relationships with companies and will be most intimately aware of the best offer for your profile.
When choosing a lender, it’s ideal that you look at all the ones out there. But unfortunately, this means dedicating significant time and effort that you may not have. Additionally, every time you apply with a lender and do a credit check, this is called a ‘hard inquiry,’ which shaves a couple of points from your score. So while you are doing yourself a favor by reviewing all the options, you might have a lesser chance of approval every time you walk into another bank for an application.
For mortgage brokers, it’s easier to find the best lender. They will ask you what you’re looking for, what your goals are, and request for your credit history just one time before talking to the ideal lender they have in mind.
Of course, hiring a broker will come with its own costs. You have to weigh how much your time is worth and see if the fee will be worth it. Sometimes, you have to pay the broker yourself. Other times, the lender is the one who gives a commission to the mortgage broker. This is something you can discuss with mortgage brokers you will interview.
Do at least half of all these steps, and you’ll be well on your way to a new house in six months.
Have fun hunting for your new forever home, and the best of luck!