What should you be doing with your finances before buying a house.
After several years of soaring home prices, the real estate market is showing signs of calming, with slight improvements in affordability and more choices for buyers as sellers list their homes for sale in greater numbers. If that’s inspiring you to make your home-buying goal a reality, it’s time to get ready. Having your finances in order and a robust home-buying team can go a long way towards ensuring you're well-positioned to put in a winning offer. With a few steps, you can work on it right now to get off to a running start.
- Start or continue building your credit.
Do whatever you can to make sure you make all your payments on time, especially rent. Request your credit report and fix any issues that you can notice. Taking care of your credit score is very important and will benefit you when applying for a mortgage. The score also affects what type of interest rate lenders will offer for the specific type of loan you want. If your credit scores need a boost, ensure you make all your payments on time every month, utilize no more than 30% of your available credit, and avoid applying for new credit that you don't need.
- Figure out how much house you can afford starting from your budget.
What would be a comfortable mortgage payment for you? Remember that mortgage payments include a lot of stuff. Principal and interest are the main ones but don’t forget about property taxes, homeowner insurance, mortgage insurance, and maybe HOA fees. How to do it? You can ask people who own a house and do simple calculations to estimate the cost. You can also use an online tool like the one by #NerdWallet – how much house can I afford calculator [1].
A good rule of thumb is using the 28/36 rule. According to that rule, you shouldn’t spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards, and other loans, like auto and student loans.
The 28/36 rule is a broadly accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford[2].
- Start saving up for a down payment.
Figure out what kind of mortgage you are going to use. It will help with estimating the minimum down payment percentage. For a conventional loan (so far, the most common), it is 3%. If you are a current or former service member and qualify for a VA loan, you are not required to make a down payment. If you are looking for ways to save, check out this list of 21 creative ways to save money for a home down payment[3] by #zillow. The more money you can save and put towards a down payment the better. Some sources talk about a down payment of 20-30% [4]. It might seem like a lot (and it is) but the reason behind it is simple. According to #financialsamurai, 20% is for the downpayment to avoid PMI (Private Mortgage Insurance) and get the lowest mortgage rate. The other 10% is for a healthy cash buffer, just in case you run into financial trouble.
- Research first-time homebuyer programs in your state.
It is worth researching if state, city, or county funds are available, depending on where you live. These funds could be in the form of low-interest loans or outright grants. If you qualify for the program, it can help you with the down payment or closing costs. It's important to note that these programs almost always consider you a first-timer if you haven't owned a home in the past 3 years. A quick Google search can be a good starting point, and you might be surprised by what is available.
- Choose a real estate agent.
It's important to find an agent with whom you feel comfortable communicating. A skilled agent can assist you in determining if your house-hunting wish list is realistic based on your price range. They can also guide you through the process of re-evaluating your wants and needs, including identifying homes in a different area that meet your needs at a lower price.
It's crucial to be well-prepared when purchasing your first house. Taking the right steps can save you a significant amount of money and stress in the long run. This will help you to enjoy your own place with your family. Educate yourself about the available options and stay committed to your financial goals. You can do it!
