Buying a home can be a very thrilling experience. Not to mention a stressful one also. This is probably the biggest financial commitment you will ever make, and finding the right house can seem like a daunting task. Getting your finances in order before you begin the hunt is a crucial piece of the puzzle. Not only will it make the process easier, it will help save you money. Here are just a few of the core money matters to which you need to attend.
Figuring Out How Much House You Can Truly Afford
With the number of people feeling overwhelmed by mortgage payments, it is clear this is not something people investigate thoroughly enough. There is the desire to get as much house as possible to keep up with the Joneses. You get pre-approved for a certain mortgage amount and want to use every cent. Just because you are cleared to spend a certain amount, doesn’t mean that is what you should be spending, at least right now. Just because your checking account would have enough money in it to cover a specific amount, doesn’t mean you can really afford that payment.
Before the home is bought, many people may overestimate how ‘okay’ they’ll be with putting a large chunk of their income towards a house. They don’t realize now how tight things may feel when they are forking over triple their current rent payment.
Sit down and crunch some numbers. Track your spending for a few months to get an idea of how much you would feel comfortable allocating. While you may need to firm things up a bit to be more financially responsible, don’t sacrifice all the joy in your life for a bigger house. Think of other financial goals you may have, like retirement fund contributions, building your savings, or putting money behind a business venture.
Get Your Credit in Order
When you see the different interest rates for each credit bracket, it may not seem like a huge difference. But, when you are talking about the kind of dough you spend for a house, and the fact you are paying it off over decades, a couple of points can mean tens or hundreds of thousands of dollars extra over the life of the mortgage. So, to say you want to go into the process with the best credit score possible is an understatement.
Generally speaking, a lender will want your debt to total no more than 36 percent of your income—this includes your mortgage payment, which is usually about 25 to 28 percent. This means the rest of your debt should only total about eight to 10 percent. Avoid taking out new credit unless absolutely necessary around the time you will be shopping for a home.
Check your credit report at least several months before you begin shopping to make sure all the information is correct. Check that each account is accurate from the amount owed to the available credit. If there is any incorrect information that has a negative impact on your score, such as a judgment being listed as pending when it is settled, it is crucial you get this corrected so your score can be adjusted. This can take awhile so that is why you don’t want to leave it until the last minute. If you are having trouble getting negative items fixed, you may need the services of a credit repair provider—firms with good BBB standing are usually the safest bet. It is important to note credit repair is not just about whitewashing bad information, it is about correcting legitimate errors or removing information that cannot be accurately verified.
Getting Together a Down Payment
The more you can put towards your house, the better off you will be. You will not only score a lower mortgage payment because you obviously owe less money, but you’ll likely get a better interest rate. In most cases, you’ll need at least five percent, sometimes even less depending on the type of loan, but you probably want to shoot for more than this if possible. Here’s the thing about saving for a down payment—you need to tweak your budget and commit to a specific amount each month. Don’t just tell yourself you’ll throw in whatever is left over each month into your savings.
With some careful planning and the willingness to educate yourself on the process, you can navigate the path to homeownership much more smoothly.