Quiz | Home Buying
3 Ways First-Time Home Buyers Can Prepare Financially
Are you dreaming of your first home but have questions on how to be prepared for the process? Read these solutions to help get your finances ready!
Ready for a change in your living situation or tired of renting? Is your family growing, or do you just want a place that feels more like your own? If so, you may be looking to buy your first home. And we want to help! But before you purchase your home, it helps to prepare financially. If you’re not sure where to start, we are here to help!
We have several steps that can help strengthen your finances before you buy your new home, such as budgeting, building your credit score and reducing current debt. The more you prepare and manage your finances before you buy your first home, the easier the road to achieving your dream of homeownership becomes!
Before diving into these helpful tips, you’ll need a starting point. Let’s start with the question, “How much of my monthly income should I spend on a mortgage payment?”
One of the first things you should do is determine 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 36% of your monthly income. But to give yourself some room for things like unanticipated expenses, it’s a good idea to estimate your ideal mortgage payment to be 28% of your monthly income. With that amount in mind, you’re ready to work toward a home of your own. Check out our monthly mortgage payment calculator so you can estimate what you can afford and what your monthly payment may be.
Saving up for a down payment is a big goal and it doesn’t happen overnight. A good tip to prepare for buying a home is to save a small amount every month for your down payment. It’s much easier to build up a down payment than trying to save one all at once. Saving a regular part of your outgoing income each month will put less of a strain on your other financial responsibilities in the long run, and it will get you in the habit of setting aside money.
In addition, calculating your current debt to income (DTI) ratio will also help. But wait, maybe you are wondering what a DTI is and why it’s important. When you apply for a mortgage loan, your debt to income (DTI) ratio is one of the measures used to see what loan amount you qualify for. It estimates how much of your gross monthly income (your money coming in) is going toward your monthly debt (your money going out, specifically to debt payments). So, knowing ahead of time what your DTI is can help you prepare and have clearer ideas for your possible loan amounts. All you need to do is add up your monthly debt payments and divide that by your gross monthly income (GMI).
Looking at Your Credit Score Before You Apply for a Home Loan
When you think of applying for a loan, your first thought probably goes to your credit score. It’s a good idea to take a look at your credit score through a free credit report online before you apply for a loan so you can see if there are items showing that may need your attention, because your credit score is one factor that will determine the type of loan and the interest rate that you may qualify for. Paying credit bills on time each month and not maxing out your credit limit are a couple of ways you can improve your credit if it’s not where you want it to be.
Things that can affect your credit include:
- Payment History
- Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit Used
Also, pulling a credit report can help many first-time home buyers make sure there are no errors that might affect their ability to get financing. If there are errors on the credit report, you can work on having them corrected prior to applying for a loan.
Managing Your Debt in Preparation for a Home Loan
Before buying a home, it’s important to reduce any delinquencies, such as late payments or accounts that are in collection, that appear on your credit report. So, the big takeaway for building or repairing your credit is to pay all your accounts on time and work on paying down any accounts that might be having a negative effect. Just like saving for your down payment over time, you can set aside money in your monthly budget that can go toward paying down debt. If you have several lines of debt and are making minimum payments, pick one to pay a little more on each month. With time, you can reduce the amount you owe. Once that debt is paid off, you can take that extra money and work on your next debt. These small steps lead toward less stress and stronger finances for you in the future.
Following these tips to get your finances ready for your first home purchase will set you on the path toward your homeownership goals.
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