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Checks and Balances: Getting Your Finances In Order to Buy a Home

by Samantha Reeves on October 14, 2013

HomeBuying 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.

  1. Property Taxes
  2. Homeowners Insurance
  3. Homeowners Association Feeds
  4. Repairs and Maintenance
  5. 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:

  1. Personal Information: Is your personal information accurate? Pay close attention to your name, social security number, and, if applicable, your spouses information.
  2. 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.
  3. 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.

{ 4 comments… read them below or add one }

1 Kevin @ Credit Bureau Insider October 21, 2013 at 11:48 AM

In addition to pulling your credit report you may want to see what your scores indicate. Sometimes scores may be low because of high credit card balances and utilization ratios.

People should keep their balances as low as possible to boost their scores. It also helps with saving towards that down payment.
Kevin @ Credit Bureau Insider recently posted..How Credit Bureaus Make Money

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2 Samantha Reeves October 21, 2013 at 2:56 PM

Hi Kevin,
That’s great advice as well. It’s important to note here that the scores you as an individual pull may be different than the scores a mortgage lender pulls due to the fact that they are weighted for mortgage lending criteria. But, knowledge is power, so knowing your scores and how to improve them is definitely going to help you out along the way!
Samantha

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3 Bob @ Simi Valley Appraiser November 14, 2013 at 5:26 AM

I think the most important thing when looking to purchase a property, whether you are a first time home buyer or not, is to not rush into things. Take your time, look at what’s around. Once you have a good feel for a marketplace, then go ahead and make an offer on a property. Basically, you don’t want emotion to overcome your common sense, it will only hurt you in the long run.
Bob @ Simi Valley Appraiser recently posted..Property Tax Assessment Appeal Appraisal

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4 Mark @ mortgagesbymark.com January 13, 2014 at 6:25 PM

The only thing I would add is that buyers should budget around 3% to 5% of the purchase price to cover escrow deposits, closing costs, and any other purchase expenses. It doesn’t mean they’ll actually incur that much, but it’s better to be safe rather than sorry.

Also, it’s super important to keep the cash for your down payment and closing costs for at least 90 days in an account that gets very little deposit activity. Banks will ask you to verify any unidentified or unusual deposits in your account, so if you have a lot of those, it can be an absolute paperwork headache (ask me how I know!). The bank will ask for cancelled checks for unidentified deposits and bank statements for any account transfers (and if you have unidentified deposits or transfers on those statements, you’ll get to document those as well!).
Mark @ mortgagesbymark.com recently posted..A Mortgage Pro’s Tips On How to Shop for Mortgage Rates And Get a Really Great Deal

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