First-time home buying is a memorable and crucial financial decision that, for many, can be a stressful one. It’s often a major expense and it is one that will likely be for the long haul. While buying your home is more than just checking up on your finances, making sure your wallet is ready for such a commitment is still an important first step to take.
But where do you start in your financial preparations? Here are just a few things to consider as you begin to financially prepare for your first home.
Monitor or Take Steps to Improve Your Credit Score
Your credit score is a major factor for lenders in determining whether or not you qualify for a mortgage loan. Checking your credit score is necessary toward understanding where you stand for lenders. First, look into different types of loans and know which one you’ll likely move forward with. Different loans will have different requirements, so understanding your desired loan’s minimum credit score requirement will help you set a goal to work toward (if your credit score is below that threshold).
If you find that your score could use some work (even if it meets the required minimum), there are a number of ways you can improve your credit. First, take a look into any debts you may have and set a plan for paying them off, especially credit card debt. Next, you may need to limit credit utilization and hold off on signing up for additional credit cards. Talk to a financial advisor if necessary, as a stellar credit score can help you receive a loan for your future house and for other big purchases such as a car.
Look Into a Mortgage Pre-Approval
Mortgage pre-approvals can make the home buying experience much simpler and allow you to put an offer on a home right away. Getting pre-approved isn’t required, but can save you a load of time and trouble in the long run. Our current times prove that we are in a true seller’s market, meaning that quick offers can be the difference between an approved or rejected offer.
An offer by someone with a pre-approval will be seen as more advantageous over an offer without one, especially in these times where it’s likely there will be competing offers. Having a pre-approved mortgage will not only give you the competitive edge needed in this market, but also allow you to have a clearer understanding of your budget for your new home. This will make certain that you’re only touring homes within your budget and will allow you to have clearer expectations for what your budget gets you for your home.
Save Up For That Down Payment
A down payment is a percentage of the listing price you pay directly that will be taken out of your mortgage rate. It’s recommended by most lenders that you put down twenty percent on the listing price. A down payment below this percentage means you’ll likely have to pay for mortgage insurance and have increased interest rates, so a sizable down payment will save you money in the long term.
However, this will mean having more than enough money saved up to accommodate this down payment. Take a look into your savings and evaluate how much you’re willing to put toward this payment and how much you’d like to remain in your savings. You should make sure that you have a reasonable savings leftover from your down payment in case of emergency expenses. Saving up for your down payment may take some financial sacrifices on your part, such as skipping on your annual vacation or getting a second job. While these sacrifices may prove difficult, it will lower your monthly mortgage payments and allow you financial flexibility for the long haul.
Set a Monthly Budget
Monthly budgets are a great way to keep yourself organized and limit any unnecessary spending on wants. When setting up your monthly budget, start by calculating your income and necessary expenses such as your current rent and grocery bills. From there, you can determine how much you’ll have left over to put toward important contributions such as your down payment, emergency fund, and even retirement plan. Setting and sticking to a monthly budget during this transitional period will help you feel confident and have a clear understanding of where your money is going. Then, once you make an offer and use your down payment funds, you can easily reconfigure your budget to meet your new needs and home expenses.
Buying a home for the first time is a daunting task, and one that requires a lot of financial planning. Having a vision and preparations in place will help give you the confidence to focus on house hunting and what your needs for your first home are. Now it’s time to get started on the home-buying journey.