There are countless things to consider when buying a home and the process requires you to fully understand your finances. Before taking this big step, uncovering hidden costs and taking hold of your money should be top of mind. It’s important to make sure you’ve done your research and are prepared before entering into this lifelong investment. Prior to making this major decision, confirm that your personal budget is in order. Getting your finances into shape can mitigate any monetary concerns, allow you to get the best mortgage for your money and ultimately prepare you to buy that perfect home. Here are a few budgeting tips and strategies to remember when buying your first home.
Prioritize Your Debt and Credit Score
Before adding any additional payments to your plate, such as a mortgage, it’s crucial to ensure you don’t have any outstanding debt that would affect your ability to get approved for a mortgage loan. Although you can technically purchase a home with debt, it may be easier to get approved for a loan and manage your home payments without any lingering liabilities. Though building good credit takes years of maintaining good habits, there are a few things you can do to give your score a boost before applying for a mortgage.
- First, take a look at your credit report. If you find any errors, you can dispute them with the credit bureau.
- Second, make a plan to pay off as much debt as you can and pay your bills on time. Paying off your debts is probably the quickest way you can improve your credit score—which is a key factor during the homebuying process. If you have the available funds, try to time your credit payments so you’re reaping the credit-reporting benefits. The best way to do this is to pay your balance down by 1% of your credit limit before your bank reports to the credit bureaus. If you’re unsure when your creditor reports, either call them or check your credit report.
- Finally, if you have a responsible family member or friend who manages their credit card costs, consider asking them if you can be an authorized user on their account. When they make their payments on time, you’ll increase your own credit score.
Revisit Your Savings and Life Insurance
If you already have a life insurance policy, a retirement account and a savings account for your down payment, an assessment of these funds may be wise before securing any property. After buying a home, you should consider increasing your life insurance policy, especially if you plan on having it cover several years of your mortgage as well as any other expenses in the event of your death. You should also verify that your current retirement contribution will be able to cover your household costs and any mortgage payments upon leaving the workforce. Finally, it's ideal to have a separate savings account for the down payment on your first home. Some mortgage programs require a down payment of up to 20% of the home's purchase price. For example, putting aside $800 a month for 3 years would allow you to save $30,000 — which is 20% of a $150,000 home.
Consider Homeowning Expenses Beyond the Mortgage
A mortgage isn’t the only ongoing cost future homeowners will incur after purchasing a home. Other expenses include maintenance and home repairs, utilities, property taxes and homeowners’ insurance—all of which prospective homebuyers should anticipate. These expenses can add up, but if you stay prepared upon acquiring these fees, you can successfully stay ahead of the curve . Most homeowners typically spend $1000 to $2000 a year on basic home policies. While homeowner insurance is often an expected expense, you may need extra coverage depending on where you live. For example, flood insurance will be required if the property is located in a flood zone. By working closely with your lender, you can take a look at any associated costs and determine what you can comfortably afford.
Purchasing a home within your budget is important as any costs you can’t realistically afford may catch up with you. Many lenders advise that buyers find a home that is no more than 2.5 times your annual salary. The overall cost of your purchase should include the mortgage, maintenance costs and home repairs, utilities, property taxes, homeowners’ insurance and any homeowner association fees. The 25% rule is one of the easiest ways to assess your homebuying budget and states that your monthly mortgage payment shouldn’t be more than 25% of your monthly gross income. Some mortgage programs allow a higher debt-to-income ratio, but buyers should remember to factor in any other debts along with their mortgage payments to determine how much they can manage to pay. Mortgage lenders will then look at a prospective borrower’s debt-to-income ratio to determine if they will lend you money, and if so, how much.
Buying a home can change your life and your financial plan. Without budgeting wisely and considering all expenses, potential homeowners can find themselves in difficult dilemmas. If you are unsure about your ability to afford a home, speak to a mortgage banker who can provide advice and resources that are tailored to your specific life situation. After reviewing all costs, strengthening your savings and staying within your means, you can create a positive homeownership experience.