Pre-Qualification: Get Your Finances In Order
Sure, you’re familiar with your own spending habits. You know how much you make. You know how much of your cash flow goes toward your rent and how much lands in the abyss commonly referred to as your “student loans.” But how intimately do you really know your finances?
Before buying a house, you’ll need to know a lot more than your general net worth. In fact, to determine what sort of property you can actually afford — and how you ought to start saving — you’ll need to take serious stock of your personal finances.
“First, you’ll obviously want to know what you have available for a down payment — making sure you’re not tapping into your emergency funds,” says Malani. “Second, you’ll want to make sure you qualify for a mortgage. Most banks will allow you to pre-qualify to figure out how much house you can afford.”
In order to pre-qualify, you’ll need to determine your debt-to-income ratio (DTI). This is essentially a number that indicates how much of your monthly income goes toward debt payments — and naturally, the lower the percentage, the more attractive you are to potential lenders. This gives you a better shot at pre-qualifying for a larger mortgage. Malani recommends using an online calculator to determine your DTI.
If you're looking to streamline the process, try downloading Turbo by Intuit. Once you input your information, the app will provide you with a full view of your lender profile, including your DTI, total debt, credit score, and verified income — all in the same, easy-to-use dashboard. It's an easy way to keep track of your credit and maintain your financial health.
“Most banks will pre-qualify you for more house than you can actually afford,” Malani explains. “Keep in mind that you may not be able to support monthly payments for a home as large as what you pre-qualify for. For example, you may pre-qualify for a $300K home but only be able to support the mortgage payment on a monthly basis on a home that’s $200K.”
In short, you’ll need to know how much you’re truly capable of setting aside on a monthly basis before you can start shopping around.
If you find that you don’t pre-qualify for the sorts of properties you’re looking to buy, this is probably a good indicator that now is simply not the right time. “Homeowning is not always the smartest investment,” Malani explains. “We’re raised to believe it’s the pinnacle of ‘adulting,’ but it’s honestly a pain in the ass. If you’re living paycheck to paycheck and you need your excess funds for weekend brunch, maybe, right now, it’s just not the right move.” Illustrated by Hannah Minn.