Buying a home can be an exciting experience – if you’re financially prepared. You’ll set yourself up for disappointment if you jump into the homebuying process without taking a few steps to get your finances in order first. Here are four important things you should be doing now, so that when you’re ready to make that purchase you can do so confidently.
Review Your Budget
Take a look at your budget to determine how much home you can afford. It’s best to think of it in terms of the maximum monthly payment you would be comfortable with, and then run a mortgage calculator (you can find one here or check out Zillow’s version here) to determine the purchase price. Don’t forget to consider an increase in utilities.
If you don’t have a monthly budget, now is the time to make one and stick to it.
If you aren’t satisfied with the purchase price that fits into your current budget, see where you can cut costs. For example: eating out less or dropping your cable package. You may also need to pay off a few debts. If these tips don’t allow you the house you’d like, you can take one of two routes: find a way to supplement your income, or lower your expectations.
Consider “Hidden” Costs of Homebuying
You’re factoring a mortgage payment in your budget, but what about other “hidden” costs of homebuying? Here are a few to add to your new home budget.
- Property Taxes
- Homeowners Insurance
- Homeowners Association Feeds
- Repairs and Maintenance
- Decorating/outfitting your new home.
Depending on the home and the area, these costs can vary. Talk with your agent, friends, and relatives in your area to get an estimate of costs.
Save for a Down Payment
Depending on the type of mortgage, the down payment amount required will differ. Even so, you should start saving now for a down payment and other costs you will incur during the homebuying process.
For conventional mortgages, you’ll need to put down at least 5 percent of the purchase price. It goes up to 20 percent if you don’t want to pay private mortgage insurance (PMI). FHA loans require 3.5 percent down, and most VA loans do not require a down payment. Take the maximum loan amount you’re comfortable with based on your budget calculations, then determine your savings goal and time frame.
Other costs that may be paid for up front include (but aren’t limited to) a home inspection, well water testing, appraisal, and earnest money. Talk with a real estate agent in your area to get a ball park on these figures, as they can vary widely by region.
Pull Your Credit Report
Generally, each individual has three separate credit reports: one from each of the three credit reporting agencies (Experian, Equifax, and TransUnion). Pull each of your reports for free at Annual Credit Report and review them for the following:
- Personal Information: Is your personal information accurate? Pay close attention to your name, social security number, and, if applicable, your spouses information.
- Accounts: Are they accurate? Go through your reports line by line to ensure each account is reporting accurately, and confirm there aren’t any unfamiliar accounts.
- Collections: Are your collections or judgements reported accurately? If you had a judgement against you five years ago that’s now resolved, make sure your credit report doesn’t reflect it as still pending.
After reviewing your report, start working on any issues that need to be resolved. You can begin by contacting the credit reporting agency that’s reporting incorrect information. From there a customer service representative should be able to give you guidance on how to dispute the error. This can be a long process, so it’s important to check your report early.
If you start the home buying process with a firm financial foundation, you can relax and enjoy shopping for a new home. Don’t reduce your opportunities by procrastinating. Be a confident homebuyer by getting your financial house in order now.
Still wondering whether you’re ready to buy? See our article on making that decision.