How to Prepare Your Finances for Home Ownership

Real Estate Agent with Keller Williams Realty

The day you decide to purchase a house, this is the day you need to start preparing yourself financially.  For many homebuyers, this takes time to prepare yourself for this financial undertaking.  First, you must develop a plan how to handle the most expensive undertaking of your lifetime.  Below are things you need to consider when preparing yourself to purchase your new home:  

Credit score – Most people understand a good credit score is needed to qualify for a home mortgage.  Potential buyer needs to prepare themselves financially, this means having a low debt-to-income ratio.  This ratio should be equal to or less than 43%.  Also encompasses having student, and credit card debts under control, etc.  Your credit score will improve as your debt-to-income ratio becomes lower. 

Down payment – Important to start saving early for your home purchase.  One way to reduce your monthly mortgage payment is to make a 20% down payment using a conventional loan.  A 20% down payment eliminates the requirement for a homeowner to pay private mortgage insurance.  For many buyers, it would take years to meet the 20% requirement, so they must use an FHA loan which only requires 3.5% down payment.  For some buyers, there are things they may be able to do to increase their capability to make a large down payment: reduce their debt by paying off prior debt, doing an expense audit, determining where they can cut expenses, not contributing to retirement savings for a short period of time, saving money received from bonuses and gifts, and/or develop a co-buyer’s agreement with parents or friends. This last suggestion has tax advantages to your partner in a co-buyer agreement.  Doing one or more of these suggestions will increase your down payment capabilities.

Budget – Be honest with yourself, prepare a budget that you can truly live with.  This will determine whether you can truly afford a home.  When preparing a budget use a mortgage calculator to estimate your monthly mortgage payment.  At the same time, speak with a mortgage lender to determine if you can be approved for a loan, estimate your closing cost and monthly mortgage payments.  Finally, when developing your budget do not forget about utility cost you will incur in your new home.  Likely these costs will be greater.  Finally, allocate an amount to save for emergencies, these will happen.

Mortgage shopping – The first thing you need to do is to shop with multiple mortgage lenders to learn how much you can afford to pay for a home.  This can be done easily and quickly without affecting your credit score.  Different mortgage lenders offer different programs and sometimes you can compete one lender against another lender saving you a small interest percentage.  A small percentage saved can save you thousands of dollars over the life of a loan.    

Closing cost – When budgeting to purchase a home, do not forget about closing cost.  Closing cost will average somewhere between 3 to 5 percent base on the price of the home.  Your lender must be aware that you have sufficient funds in your account to cover closing cost.

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