(NewsNation) — Purchasing a house can be incredibly stressful, especially for those who are unprepared.
According to the real estate site Redfin, a growing number of homebuyers are skipping the mortgage process and paying cash. Nearly 32% of homebuyers paid all cash for a home in 2022.
For those who don’t have the luxury of buying with cash, the need for advanced preparation becomes all the more urgent.
Investopedia recommends buyers take care of these six financial prerequisites before showing up to an open house:
1. Collect the Down Payment
A down payment is the money you pay upfront to offset the amount you need to borrow in the future.
Ideally, you have saved up about 20% to put down. This will allow you to get the best rate available and skip private mortgage insurance, according to Investopedia.
“Lenders have tightened the requirements since the economic crisis in 2008,” Karen R. Jenkins, president and CEO of KRJ Consulting, told Investopedia. “As a result, prospective borrowers seeking to purchase a home must have some ‘skin in the game’ to qualify for a home.”
2. Choose a Lender
Spend time shopping around for a lender. Investopedia recommends people start out by checking with their own bank, which may offer a better rate because of the existing relationship.
Before meeting with a lender, research or compare interest rates in a mortgage calculator. It will offer an idea of your real costs at various rates.
3. Check Your Credit Score
A FICO score is a critical piece of information, indicating to lenders how likely people are to repay the money they borrow.
The higher a credit score, the better the interest rate homebuyers will be offered. Investopedia warns that those who have a bad score or, even worse, no credit history at all, will find it very difficult to qualify at all.
4. Know Your Debt-to-Income Ratio
Debt-to-income ratio (DTI) represents the percentage of one’s gross income that goes toward paying off debt and interest each month. Meeting mortgage requirements will be easier based on how low the number is.
5. Set Aside Closing Costs
Be prepared to set aside closing costs. On average, they run from 2% to 5% of the home’s purchase price. They’re fees buyers must pay to various parties at closing.
6. Apply for a Mortgage Pre-Approval
Applying for a mortgage pre-approval requires buyers to submit several documents that prove their ability to pay off a mortgage.
A lender can give buyers a checklist of the required documentation. Generally, it includes pay stubs, tax returns, bank statements, W2 forms and employment verifications. Pre-approval is generally a speedy process and can save buyers time in the long run.