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Home Buying 101: How to Determine When You Are Ready to Buy

Financial experts predict interest rates on homes will increase to about 4 percent in 2022 — up from about 3 percent last year.

If you are looking to buy a home before interest rates rise, it is a good idea to do your homework to make sure you are ready to take the plunge. Here are a few things to think about.

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  • Make sure you have a steady income. Before purchasing a home, it's important that you feel secure that you can maintain your income at its current level (or higher). To qualify for a loan, you will need to show a lender your employment history and past pay stubs or tax returns.
  • Consider how long you plan to stay in your home. Since closing costs typically total 3 to 4 percent of the cost of the home, it is important that you plan to stay in your home for a few years to recoup those costs and build equity (the difference between what you owe on your home and what your home is currently worth).
  • Monitor your credit score by reviewing your free credit report every 12 months. To order your free credit report, visit www.annualcreditreport.com. To increase your credit score, make sure to pay your bills on time, have a credit card and limit the number of credit inquiries if you are planning on buying a home. Strong credit scores may help keep your interest rate low on a new loan.

    Please note: If shopping around for the best rates on a loan, try to submit your applications within a 14- to 30-day time period of each other. This ensures your credit score may not be impacted each time your credit history is pulled within that window.

  • Keep your debt-to-income ratio low: A debt-to-income ratio helps lenders determine how much home you can afford to buy when qualifying for a mortgage. The ratio is determined by dividing your monthly debt payments by your gross monthly income (the amount you make before taxes and other deductions). What is included in the monthly debt payments varies by lender and may include home loans, car payments, student loans, minimum credit card payments and other expenses.
  • etermine how much home you can affordD. In addition to reviewing your debt-to-income ratio, make sure you crunch the numbers to find out how much you can comfortably spend on your home. Even if you qualify for a certain amount, that does not mean it makes good financial sense for you to take on that large of a mortgage.

    Some experts recommend that you do not spend more than 28% of your gross income on mortgage payments. This would mean that you should not spend more than $28,000 a year (or about $2,300 per month) on mortgage payments if you earn $100,000 (before taxes) annually. Check out WaFd Bank's home loan calculator to calculate possible monthly mortgage payments.

  • Keep an emergency fund. When it comes to saving, many experts recommend having enough money available to cover three to six months of living expenses. After paying a down payment and closing costs on your home, make sure you still have money in your emergency fund.
  • Be ready to trim costs to stay on track with your budget. To better manage your budget, find a budgeting app or create a budgeting worksheet to document your typical monthly income sources and expenses. This will help you see where you can make some cuts. WaFd Bank offers a free online app-based budgeting tool where you can track your spending.

Need help managing your money?

We're here to help. Call us at 800-324-9375 or visit wafdbank.com to open an account today or learn more. WaFd Bank offers mortgage loans with competitive interest rates.

MEMBER FDIC, Equal Housing Lender, loans subject to credit approval

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