If your New Year's resolution is to buy a house next year, there are things you should start doing now to prepare. Here are two things that need to be at the top of your action list if you want to get the home of your dreams in 2017.
Season Your Down Payment
Depending on the lender, you may be required to put up a down payment of as much as 20 percent of the home's price. However, that money can't come from out of thin air. Even if you experience a financial windfall, banks want to make sure the cash is coming from a legitimate resource, which why they require funds to be seasoned.
No, this doesn't mean throwing some pepper and turmeric on your cash. Rather, the money must have been sitting in your bank account for a minimum of 60 days. Additionally, some banks may require there be a paper trail showing where the cash came from. The purpose of this condition is to make sure the money is not coming from illegitimate sources (e.g. criminal activity) and to ensure you didn't take on more debt to pull together the down payment (e.g., take out a second loan).
Seasoning funds is as simple as putting the money in a savings account and letting it sit for two months. If the bank requires proof of where the cash came from, use that time to gather together check stubs and other documents detailing how you got the money. The only time you don't need to season funds is if you get the money from your employment, retirement fund, or it was gifted to you.
Get Your Debt-To-Income Ratio as Low as Possible
A bank's primary concern is ensuring you won't default on the mortgage. While lenders do look at your credit, they are also concerned with your income and debts. In particular, your debt-to-income ratio typically needs to be under a certain percentage before a bank will even consider approving you for a mortgage.
According to the Consumer Financial Protection Bureau, 43 percent is the maximum debt-to-income ratio a homebuyer can have and still be approved for a Qualified Mortgage. This means, your current debts should require no more than 43 percent of your monthly income to pay. Though there are some banks who will lend you money if your debt-to-income ratio is higher than 43 percent, you may not get the best terms.
To get your debt-to-income ratio, add up all your monthly payments, divide it by your monthly income, and multiply the result by 100. If the result is over 43 percent, work on paying off your debts until you get under that threshold.
For more tips on preparing to buy a home in 2017 or to look at homes for sale, contact a real estate agent.
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