Guide | Home Buying
How to Get Financially Prepared to Buy Your First Home
Is it time for you to take advantage of a good housing market and buy your first home? If so, it is time to get financially prepared for your first home purchase through things such as budgeting, building your credit score and reducing current debt.
There are several ways to get prepared financially for your new home. Check out these tips for first-time home buyers to budget for the home of their dreams.
How Much of my Monthly Income Should I Spend on a Mortgage Payment?
One of the first things you should do is figure out how much you can realistically afford to pay on your house every month and still have money to spend on other expenses. You should plan for your mortgage payment to be below 35% of your monthly income1. Some lenders may even recommend limiting your mortgage payment budget to 28% of your monthly income.
How to Get Financially Fit
The more you prepare and manage your finances before you buy your first home, the more likely you will achieve your dream of homeownership! Here are some ways to get your finances ready for homeownership:
A good way to prepare for buying a home is by saving a small amount every month to go toward your down payment. Doing this and also calculating your current debt to income ratio will help you prepare for your new monthly house payment2. Check out a monthly mortgage payment calculator so that you can estimate what you can afford and what your monthly payment may be.
Your credit score is one factor that will determine the type of loan and the interest rate that you may qualify for. Pulling a credit report can help many home buyers make sure there are no errors that might affect your ability to get financing. If there are errors on the credit report, you can work on having them corrected prior to applying with a lender for a loan.
Things that Can Affect Your Credit Include:
- Payment History
- Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit Used
- Debt — It is important to reduce any delinquencies appearing on a credit report. Of course, it helps to have a report without any history of late payments, but the most important thing is to not have delinquent balances prior to applying for a loan.
If you follow these steps to get your finances ready for your first home purchase, you will be on the road to the home of your dreams.
1 Trulia, "How Much Of My Monthly Income Should I Spend On A Mortgage?" Forbes, March 03, 2017, accessed November 03, 2017, https://www.forbes.com/sites/trulia/2017/03/01/how-much-of-my-monthly-income-should-i-spend-on-a-mortgage/#1993ce617a90.
2 "What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?" Consumer Financial Protection Bureau, March 03, 2017, accessed November 03, 2017, https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/.
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