Boosting Your Buying Power: Strategies for Prospective Home Buyers
Empowering yourself with increased buying power is one of the best ways to ensure a smooth and successful home purchase. While the numbers may seem daunting, strengthening your financial standing can significantly improve your chances at each step of the home buying process.
When envisioning your dream home, it’s common to focus on physical characteristics. However, to mortgage lenders, a home is a numbers game. The following categories related to your buying power demonstrate how lenders evaluate your financial standing and determine your eligibility for a home purchase. Improvements in these areas will enhance your buying power, boosting the strength of your offer when you’re ready to put it on the table.
Increase Savings for Your Down Payment
As the saying goes, cash is king. The down payment—often 20% of the home’s sale price—can sometimes be the deciding factor between competing offers for a particular home.
Start by stashing away a portion of each paycheck to build up your savings over time. Set a savings goal, commit a dedicated amount from each pay period, and watch your savings grow. If you prefer to keep your money separate, consider opening a new account specifically for your down payment savings. Additionally, generating extra income through part-time work or side gigs can help you accumulate the necessary funds more quickly.
Offering a significant down payment has numerous benefits. Putting 20% or more down can help your offer stand out, allow you to negotiate a lower interest rate on your mortgage, and potentially eliminate the need for private mortgage insurance (PMI).
Improve Your Credit Score
Plain and simple—a better credit score leads to a better interest rate on your mortgage. Your payment history, amounts owed, length of credit history, credit mix, and new credit all factor into your credit score. Although improving your score takes time, the long-term benefits are well worth the effort.
To improve your credit score, focus on paying down your credit cards, especially those with high interest rates. Refrain from opening new lines of credit that aren’t necessary and avoid large purchases as you prepare to make an offer. Remember that student loans factor into your financial picture; consistent, on-time payments can improve your standing in the eyes of lenders.
Stabilize Your Debt to Increase Buying Power
When assessing what you can afford, banks will examine your debt-to-income ratio. Lenders want to know that you’ll be able to pay your mortgage on top of your remaining debt.
They do this by looking at your housing ratio, or front-end ratio, to determine what portion of your income will go to paying your mortgage. Your front-end ratio is calculated by taking your monthly mortgage payment and dividing it by your monthly gross income. The higher the ratio, the higher the risk of default.
Next, your back-end ratio, or debt-to-income ratio, is used to determine how much of your monthly income goes toward paying your debts. Your back-end ratio is calculated by taking your monthly debt expense (including mortgage payments, credit card payments, student loans, and other loan payments) and dividing it by your gross monthly income.
Similar to your credit score, paying off credit cards and making steady, consistent progress on your loans will help decrease your debt and improve your debt-to-income ratios, thus increasing your buying power.