How to Financially Prepare to Buy a New Home

Thinking about buying a new home this year? Your first step is getting your finances ready for this major purchase. Your finances play an important role in your ability to buy a home so it’s smart to start working on them as soon as possible. Here are the top steps you can take to prepare your finances to buy a new home this year.

Check your credit

Your credit score, a three-digit number scoring your ability to pay a debt, is an incredibly important number. Your credit score will determine the types of loans you’re eligible for and your interest rate. In short, the higher your credit score, the more likely you’ll qualify for different loan programs and more favorable interest rates.

Request a copy of your credit report (everyone is entitled to a free credit report from each of the three major credit bureaus – and requesting a report will not affect your credit) and carefully review it for accuracy. Report any mistakes as soon as possible.

Continue making on-time payments on your monthly bills and keep your credit utilization ratio low. Ideally, you should keep that ratio, which is how much you owe on your cards compared to your spending limit, to about 30% or lower. Also hold off on opening new credit accounts, which will temporarily lower your score.

It can take several months to see any changes in your report so the earlier you start working on this step, the better.

Calculate your debt-to-income (DTI) ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly pre-tax income used to pay bills. Lenders use this ratio to make sure you’re able to afford your proposed mortgage.

Your DTI is calculated by adding your current monthly debt payments (e.g., student loans, car loans, credit card payments, etc.) and then dividing by your gross monthly income (before taxes and dedications are removed).

If your DTI is on the higher side, work on paying down as much debt as possible and slow down credit card spending.

Determine how much you can afford

There are a lot of factors to consider when determining how much you can afford. Lenders will review your financial history and current income and debts to determine how much they think you can comfortably afford. But it’s important to do your own calculations as well. Remember, there’s more to owning a home than just paying your monthly mortgage. You should also take into account home insurance, property taxes, utilities, and maintenance costs.

You don’t have to borrow the full amount offered by your lender. Stick with what you feel comfortable spending. Take a look at your budget to figure out how much you can comfortably afford. Home affordability calculators are good for estimating your personal number as well. Knowing what you can realistically manage will set you up for success.

Budget for upfront costs

As you work on paying down debt, create a budget for your new home. This should include some of the upfront costs you can expect to provide including earnest money, down payment, closing costs, homeowners’ insurance, and an emergency fund.

Make saving easier by setting up automated transfers into a separate savings account. You can funnel windfall income like bonuses, cash gifts, or tax refunds into your savings as well.

Get preapproved

Once your financial ducks are in order and you’re ready to start looking at homes, meet with a lender to get preapproved for a mortgage. The preapproval process is an in-depth investigation into your financial history. Lenders will review your credit report, income, assets, and debts, and verify employment and income among other things. At the end of the process, you’ll receive a document outlining the full amount you’re eligible to borrow.

While being preapproved isn’t a guarantee of having secured financing, being preapproved lets sellers know you’re a serious buyer. It’ll also help you be prepared to make an offer when you do find the home you love.

Buying a home doesn’t happen quickly; it takes research, planning, and careful consideration to make sure you’re making the best decision for your family.

When you’re ready to start your journey to your new home, visit us at to learn more about our new home communities throughout Northern California! View virtual tours, floorplans, and more online. We look forward to helping you find your home.