Buying a house is a big step, and it’s one that you shouldn’t take lightly. But it can also be an incredibly rewarding experience — as well as a great investment over time. Before you get to that point, you’ll need to get your finances in order. While that process may differ slightly depending on your current financial situation and any variations on the traditional process of buying a home (rent to own homes, for example, work a bit differently), there is a general structure that has the best chance of setting you up for financial success. Here are the five steps you’ll want to take before you even start looking at listings:
- Clean Up Your Credit Score
Your credit score heavily influence the loan rates you’ll be offered, so it’s very important. It can also take a long time to improve, which is why it’s wise to start monitoring your credit carefully a few years before you’re hoping to buy. Scrutinize your credit report to make sure your credit isn’t being unfairly lowered due to mistakes or debt that’s been paid off.
- Calculate What You Can Afford
Sit down and calculate how much you could afford to pay each month for your mortgage and associated home expenses (insurance, taxes, etc.). If you’re hoping to get a mortgage secured by the federal housing administration, that figure needs to be no more than 31% of your monthly income. If you’d like to err on the safe side, then 28% is a better figure.
- Try On Your New Budget
To make sure you’ve done all your calculations correctly, start living with that projected budget in mind, taking the difference between your projected mortgage payment and your current housing costs and putting it in the bank. You don’t want your new financial situation to be a shock when you move into your home.
- Save for a Down Payment
You’ll want to save a significant amount for a down payment. If you have less than 20% to put down, you’ll probably be required to take out mortgage insurance — and, of course, you’ll end up paying both more per month and more overall for the house (because of interest). Also take into account closing costs, as you may or may not be able to get the seller to pay them.
- Get Pre-Approved for a Mortgage
You need to secure your financing before buying a house. That way, you’ll be able to jump on the opportunity when the perfect home comes on the market.
After completing all five of these steps, you’ll finally be ready to buy a home.
Do you have any other recommendations on how to prepare financially for buying a house? Share your tips in the comments.
