The season for home buying is just around the corner. Given the warmer weather, home buyers are eagerly waiting to find their dream spot.
Since buying a home is usually the largest purchase you will make, preparing your finances can provide you with a significant profit. For example, if your credit score is high enough, you can get more competitive interest rates with mortgage lenders.
also Save for the depositThere are other costs with the home buying process.
If you are looking to become a homeowner anytime soon, let me show you how to prepare your finances so you can get a better deal on your home and still have money to spare for other things!
Buying a house: More than just the down payment
While the primary focus is on preparing a reasonable down payment, it is about more than just your mortgage payments.
Lenders look at factors like income, debt-to-income ratio, but a big factor is also your credit score. Your credit score is based on your credit reports. You have three credit reports and scores from each of the credit bureaus – Experian, Equifax, and TransUnion.
Do you want the best price Increase Your Credit Score
Although the exact algorithm will not be made public, we know it Key factors in calculating your score.
35% payment history
30% owed amount
15% repayment term
10% new credit
10% credit types
When looking at how things are weighted, if you want to have the greatest impact on your creditworthiness, you need to focus on your payment history and keep your debt in check.
Before you start your house hunt, let's see how you can improve it to get your score better.
The first thing you need to do is get a copy of your credit report and make sure it is correct. Believe it or not, the chances are your report contains an error. It was even estimated that More than 20% have an inaccuracy in their credit report. While it could be a small detail like a misspelled name, if there is an error with your payments or an open account that doesn't belong to you, it can really hurt you.
Due to the pandemic, you can now access your credit reports free weekly at AnnualCredit Report.com. If you find a problem, you can file a dispute with the credit bureau. In the meantime, keep your payment history up to date by automating it using your bank or credit union's invoice payment system.
You should also take into account that lenders will check your finances to make sure you can handle a mortgage. You also want to make sure that your debt to income ratio is relatively low. Paying off your high interest debt can be a great asset. When it comes to credit cards, once you have paid out you may want to keep the accounts open at least until you buy your home. Lenders usually look cheaply for those who have unused lines of credit. If you want to avoid the temptation to use it, you can stash your credit cards in an inconvenient but safe place near your home.
Find out how much house you can (comfortably) afford
After your credit report is correct and your score improves, it's time to take the next step in preparing your finances. Find out how much house you can afford. In addition to having your mortgage lender calculate how much you can afford, it is also wise to determine the number yourself. Chances are, your goals are other than just buying a home.
When we were looking for our first place to live, we ran the numbers and then checked them against what the lender had. With their calculations, we could afford a much more expensive house. We looked back at our number and quickly realized that if we hit the maximum budget, we could buy a house, but nothing else.
You may think the same way. You would like to buy a home but also want to have some extra cash to enjoy it and other goals. You cannot achieve them when your budget for your home is at its maximum. You need to see for yourself what you are comfortable with so that you can become a homeowner and still achieve your goals. How Do You Find Out How Much House You Can Afford?
As a rule of thumb, try to keep your mortgage no more than 2½ to 3 times your annual income. Let's say your family's annual income is $ 65,000. With this guideline, you would be looking at homes valued between $ 163,000 and $ 195,000. If you're a family earning $ 120,000, you can enjoy hunting lodges between $ 300,000 and $ 360,000 with some cash left for other dreams.
Once you know how much to save, you can start using features like Coin Targets to track your progress with the deposit. I noticed that a visual reminder has motivated many families to pursue their goals. When you have reached certain milestones, have a small party.
Why your deposit matters
One of the main reasons you might want a larger down payment is to avoid paying private mortgage insurance (PMI). This gives the lenders extra security for the money they are lending, but it can be an unnecessary weight to you.
With every payment, start automating transfers into savings, even if the amount is less than hoped. You can then increase your down payments by redirecting any income (such as a bonus, stimulus check, or tax refund) into your savings. Having a larger supply can be of great help when buying your home!
Closing costs: what you need to know
You saved your down payment, found an agent, and found your dream home. Your offer was accepted. Before celebrating, keep in mind that there are a few other costs the closing process.
I pulled out the paperwork when we bought a house a few years ago and here's what I found:
Loan discount points
It probably seems like too much and to some extent I can understand. Some of these fees are non-negotiable and some are not. However, you want to be careful about what expenses you want to save on. Skipping a home inspection is not a smart move, even with a new build. Believe me, we were there.
When we bought our first home it was new build so we thought it would be ok to skip the inspection and save some money. However, new builds do not guarantee a good job. We had small bugs that turned into big headaches, and when we sold our space about five years later we had all but one of the windows replaced.
Would the inspection help us catch all of these things? No, but it would have given us a clearer idea of the expenses we could expect. At our second house we received an inspection which not only helped us understand what future projects to tackle, but we were also able to use it as a negotiating tool.
I hope these tips will kickstart your goal of becoming a homeowner. I want you to buy a home that you love, but all of your financial and family goals can be pursued!
Register with Mint today
From budgets and bills to free credit scores and more
Discover the effortless way to stay on top of things.
Learn more about security