Buying a home is something that requires a great deal of planning and preparation. In fact, rushing this process will likely result in higher expenses from the purchase of the home to the amount you pay in interest. By developing a financial strategy several years in advance, you’ll be better able to buy the home of your dreams when you are ready to take that plunge.
Determine How Much House You Can Afford
Your first step will be to determine what type of home you want to buy and what you can do to afford it. You should start by reviewing listings online to see what types of homes fall into your budget. You can use any of a number of online mortgage calculators to determine your monthly payments, which will help you estimate how much home you can afford. In doing these calculations, keep in mind that you’ll also have to pay insurance premiums and property taxes. Try to be as realistic as possible in determining how much you can afford to pay out each month for your housing costs without putting yourself in a tight position.
Start Paying Down Your Debts
Your next step is to pay off as much of your debt as possible, while you make sure every bill is paid on time each month. This is important for a couple of reasons. First, reducing your debt will increase the amount you can comfortably afford to pay for your new home. Secondly, paying down your debt and maintaining a good repayment history will help you boost your credit score in a short period of time. A better credit report will help you get pre-approved faster and help you get lower interest rates on your mortgage. You’ll also have less to worry about with a better income to debt ratio.
Save For Your Down Payment
No matter where you go for your home loan, you’ll be expected to offer something as a down payment. The down payment is required to show your commitment to the loan and helps establish that you’re a good risk. Most commercial lenders require a 20% down payment, although there are various government programs that will qualify you for a mortgage with a 3% down payment. These programs typically require meeting certain restrictions, such as income limits or belonging to a marginalized group. Additionally, if you’re a former service member, you can find a better deal by searching VA loan limits Riverside. You may be surprised to find out how many government programs are available to first-time home buyers.
Keep an Eye on Your Credit
You can get a free report from each of the three main credit bureaus each year and you should take advantage of that opportunity. Errors may show up on your credit report that brings down your score, but, by disputing those errors, you can fix that problem. Additionally, checking your report every year will help you ensure you haven’t been the victim of identity theft. Spotting errors and getting discrepancies fixed will help you maintain a more accurate score, which will be essential in helping you get approved for a mortgage with the best possible terms.
Keep Your Savings Account Growing
Even after you have saved enough for your down payment and closing costs, you should continue to grow your savings. Financial experts suggest a conservative estimate for a homeowner’s savings account should be equivalent to 10% of the purchase price of your home. Ideally, you should continue to save well beyond that amount. As a homeowner, you’ll be facing costly repairs for as long as you own your home, and you won’t want to borrow money for every expense. Additionally, household emergencies often come in groups, so you should expect to face more than one financial emergency at a time. A roof replacement failed water heater, and mold growth are just a few of the emergencies you should be prepared to finance in a short period of time.
Creating a financial plan will help you buy the home you want in the years to come without putting you in a risky financial situation. As this overview suggests, there are a number of different homeownership expenses beyond the purchase price of the property. Taking the time to prepare for these expenses will help you avoid many of the hardships that rushing to own a home will otherwise bring.