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The Choosi Blog

Your Guide to Preparing Your Bank Account for Homeownership

Buying a home is one of the most significant financial decisions most people will make in their lifetime. It's an exciting milestone that comes with a lot of responsibilities, so it's important to be financially prepared before diving into the process. Here are some tips to help you get your bank account ready before buying a home:

1. Check your credit score

Your credit score plays a crucial role in determining your eligibility for a mortgage and the interest rate you'll receive. A higher credit score will help you qualify for better mortgage rates, saving you thousands of dollars over the life of your loan. Aim for a credit score of at least 620. If your score is lower, work on improving it by paying bills on time and keeping credit card balances low. Your credit score is influenced by factors like your payment history, credit utilization, and credit history length. You can check your credit score for free using various online tools and take steps to improve it if necessary. We share more about the credit score in this article from our blog.

2. Understand your overall financial health

Before applying for a mortgage, it's essential to determine how much you can afford to spend on a home. This involves analyzing your income, expenses, and debts to create a realistic budget. You can use a mortgage affordability calculator to determine the maximum home price you can afford based on your income, debt, and other expenses. Keep in mind that you'll also need to save for a down payment, which is typically 3% to 20% of the home's purchase price. Learn more about what’s needed here.

3. Assess your debts

Your Debt-to-income ratio (DTI) is a crucial factor in determining your ability to repay your mortgage. It measures how much of your monthly income goes toward paying off your debts. A high DTI can make it harder for you to qualify for a mortgage or result in a higher interest rate. The majority of lenders prefer a DTI of 36% or lower. You can calculate your DTI by dividing your monthly debt payments by your gross monthly income. If your DTI is higher than 36%, consider paying off some debts to reduce it. You can learn more about DTI in this article.

4. Save for a down payment and closing costs

Saving for a down payment is one of the most significant financial barriers to homeownership. In addition to the down payment, you'll also need to budget for closing costs, which typically range from 2% to 5% of the home's purchase price. Closing costs include fees like title insurance, appraisal fees, and legal fees. It's essential to have enough cash saved up to cover these costs to avoid any surprises during the closing process.

5. Have accessible cash

In addition to saving for a down payment and closing costs, it's essential to have accessible cash on hand to cover unexpected expenses that may arise during the home buying process. These expenses can include home inspections, repairs, and renovations. By having some extra cash on hand, you can avoid putting these expenses on credit cards and incurring high-interest rates.

6. Organize your savings

Whether you're still saving or you have the cash on hand, you're going to need to figure out what to do with your money. A simple choice is to keep all the money you plan to use for the down payment in your savings account so you can easily access it when it’s time to move the money into escrow. If you want to make some money while you wait, you can also put it into a high-yield savings account or a long-term certificate of deposit (CD).

Preparing yourself to buy a home involves taking a closer look at your finances, determining your budget, taking steps to improve your credit score, and reducing your DTI. It's also important to save for a down payment and closing costs, as well as having accessible cash on hand for unexpected expenses. By taking these steps, you'll be in a great position to navigate the home buying process and achieve your dream of homeownership. Don't forget, we're here to help you #staychoosi

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