For many people, owning a home is considered a rite of passage. Just like marriage and babies, it’s something that society looks favorably on. Not only are you setting down roots in your community, you are building equity and thinking long-term. Most mortgages are 30 years, so, even if you don’t plan on living in the home for that long, signing those loan documents forces you to think into the future.

But the future doesn’t start with shopping for that first place. It’s a good idea to start even further back and work on one’s finances beforehand. In order to qualify for a loan, the lender will run a debt-to-income ratio on you (DTI). They divide your total monthly obligations by your gross monthly income. They also want your mortgage payment (plus insurance, taxes, and any HOA fees) to be no more than 28% of your gross monthly income. This is called your housing ratio. If you come in at over 28% for the housing ratio, and/or over 36% for your DTI, you might end up with an alternative loan like FHA or VA. If you come in at over 43%, you may end up in subprime land, with higher interest rates.

There is nothing wrong with subprime loans (now called non QM, or non-qualifying mortgages) if your situation requires it. And FHA & VA loans are quite good. However, in order to keep your interest rates – and thus your payments – as low as possible, it’s important to think ahead. If you know you want the option of buying a home in the future, now is the time to think about your finances.

Have you run your credit report recently? If not, visit annualcreditreport.com to get your free report. Make sure everything on there is really yours. Don’t just trust the banks and credit companies to take care of you. Check your statements every month (even every week, if you have time) to make sure that your private information has not been breached.

Assuming everything on the credit report is really yours, consider your monthly budget. Do you have the ability to plunk down a little more on those debts in order to bring them down faster? Is there a way to get out of your car lease and just purchase something cheaper outright? Is there a side hustle you can create so that you can stash away a little extra cash? Increasing your down payment to 20% or more puts you in the best position to get a good-looking loan.

Or, you might already have a home and are thinking about refinancing. Consider how paying off some of those pesky debts could raise your credit score and potentially allow you to upgrade in a couple of years.

The point its, it is never too early to begin planning your financial future, especially if owning a home is something you dream of.

All my best always,

–R.B. Kushner

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