Buying a new home can be intimidating. There are tons of houses to see and paperwork to file but first, you need to get your finances in order before taking on the many costs of your new home.
Organizing your finances before you start looking, will ensure a stress-free experience on this new house-hunting adventure. Keep reading for some of our best tips on organizing your finances.
Tip 1: Get Your Credit Ready for Home Buying
Your FICO score is determined by several things, and it’s never easy to figure out what’s more important. Here are a few steps you can take to make sure your FICO score is as high as possible.
Step 1 – Make sure that you use less of your available credit
Step 2 – Pay all of your bills on time.
Step 3 – Hold off until after you purchase your home to open any new credit accounts
Step 4 – Make sure that you have a good mix of accounts such as home loans, credit cards, and student loans, rather than just one kind.
Make a plan to pay off existing debts and decrease your debt-to-income ratio (DTI). DTI is the amount you earn compared to the amount you owe to your creditors, aka credit card debts and student loans. This is important to keep an eye on this because dependent on the type of loans, mortgage lenders tend to prefer a ratio of 43% or less.
Don’t worry – if you have bad credit or DTI ratio, working through these steps will help you out. A higher credit score will make it easier for you to get a loan with a good interest rate.
Tip 2: Work with the 28% Rule
Working with a 28% rule is a great rule of thumb for you to use when purchasing a new home. This rule states that the mortgage you take on should never be more than 28% of the gross income you bring in each month. 28% is high enough to add in some extra cushion for surprise costs like repairs and insurance.
This is the best way to ensure that you will meet the debt-to-income ratio for future lenders. Knowing what you can afford from the start will make it much easier for you to find a home in your price range.
Tip 3: Choose a Low or No Down Payment Mortgage
As you look at different methods that will help you to finance a new home, prioritize considering which type of mortgage is best for you. A low or no down payment mortgage can make a lot of sense because you will be required to bring less to the table to get started.
Please look at all your options before deciding. Some will allow a 0% down payment and will roll closing costs into the price of the loan. Others will require some down payment, but many will stay at 5% or less depending on the program that you decide to choose.
Before applying for these loans, do the calculations to see if they make sense for your needs. While a low down payment can make home ownership easier for some, you will still need to pay the private mortgage insurance (PMI) in your monthly payment. There are also other rules and regulations you must meet before you can qualify for these loans.
Tip 4: Remember the Other Costs
While the down payment is going to be one of the biggest costs when you buy a home, there are other costs that you must consider.
Think about all of the other costs that will come with this such as insurance, yard maintenance, monthly utilities, and so on. Some home buyers will find that they can afford the purchase of the home, but then the cost of utilities and the cost of upkeep will eat up too much of their money every month.
Some other things to consider – If you live in an area where power or other utilities may go out during bad winter storms, you may consider paying for protection to help keep you comfortable during that time. Make sure to think of as much as possible and consider whether you can afford the entire cost or not.
Tip 5: Be Realistic
The last thing that you should always be here is realistic with your finances and goals. Having a number in mind on what you can afford realistically from the start will make a world of difference. Make sure to stick within that budget and you’ll be able to pay off your new home comfortably.
Follow all the steps above and get your finances prepared the right way!