A Home of Your Own: How to Evaluate Your Financial Readiness and Save for That Big Down Payment

4 Things You Shouldn't Overlook When Buying a Home

Everyone wants a piece of the American dream, and for many people that dream includes owning a home. But owning a home is one of the biggest financial steps you can take in your life, so it’s important to carefully assess your financial situation before jumping in headfirst.

We’ve asked some financial and real estate experts to share their tips to help you prepare for the exciting plunge into homeownership.

1. Keep Track of Your Spending

Creating a budget—and tracking your spending to ensure you stick to it—is an important first step to get a sense of where you stand. Roshni Chowdhry, innovation and product development lead at SafetyNet, says, “Understanding where you allocate your money will give you a realistic expectation of what you can afford.” Whether you use a pen and paper, Excel, or an online tool, tracking the inflow and outflow of money for at least a month is a good place to start.

2. Evaluate Your Down Payment

According to Bank of America’s recently released Homebuyer Insights Report, almost one-third of first-time buyers believe they need 20% of a home’s price for a down payment. However, that’s not always the case.

Down payments can range between 5% and 20%, and according to Kathy Cummings, senior vice president of homeownership solutions at Bank of America, “There are affordable entry points to homeownership that require significantly less than 20%.” Keep in mind, however, that the lower the down payment, the higher your monthly mortgage payments will be. You may also have to pay mortgage insurance if your down payment is under 20%.

3. Crunch Some Numbers

Before you start working with a real estate agent, do your due diligence and utilize online tools like mortgage calculators so you are well informed and ready to answer the slew of questions your agent will have for you.

Account for any additional costs, too. Michelle Waymire of financial advisory firm Young + Scrappy says, “When planning for a big purchase, be sure to include all the incidental costs associated with it. For example, saving for a house doesn’t just include a down payment; you also need to consider closing costs and an emergency fund to have on hand in case of home maintenance needs.”

4. Get the Purchasing Power of a Pre-Qualification

Once you know how much money you have to play with each month, Tami Halton Pardee, a real estate broker and founder of Halton Pardee + Partners, recommends speaking to a mortgage broker—whom your real estate agent can introduce you to—to get pre-qualified for a mortgage. “Getting pre-qualified and having a realistic sense of what your spending ability is prior to beginning the house hunt leaves you much more mentally and emotionally prepared,” she says.

Also, if you’re pre-qualified and find a home you like, your offer will be taken much more seriously than someone who is not pre-qualified.

5. Keep an Eye on Your Credit

If you’re gearing up to buy a home, there’s one three-digit number that should be a top priority: your credit score. A high credit score will qualify you for the best loans at the best rates, saving you substantial interest over the life of your mortgage.

Beth Kobliner, a personal finance expert and bestselling author, says, “One of the best ways to build [your credit score] up is by paying your bills on time, every time—that means credit cards, utilities, and student loans. Automating these payments can make the process less painful. Plus, keep an eye on your utilization ratio. That’s the amount of credit you’ve used—on a credit card, say—compared to the amount of credit available to you.” Many experts agree that keeping your utilization under 30% will prevent it from hurting your overall credit score.

6. Start Saving Now

As soon as possible, start socking money away for that down payment. A favorite saving tactic amongst many financial experts is to automate the process so you don’t have to think about it. Justin Lavelle, chief communications director of online background check platform BeenVerified.com, says, “Once you know how much you need, you want to start saving in a way that makes it routine. Auto withdrawal services are a good way to do this. Set up certain amounts that will automatically be deposited into a savings account for your future purpose.”

If buying a home will cost you more than what you are currently paying for housing, Lavelle suggests aiming to save that difference amount so you can get comfortable with a lower monthly outlay. 

7. Consolidate Your Debts 

Try reducing expenses by consolidating any debt, and put what you save in interest into your down payment savings fund. Personal finance expert Andrea Woroch says, “If you’re carrying a revolving balance across your credit cards, for instance, tighten up your budget and save money by consolidating debt into one easy-to-manage personal loan with a low interest rate.”

Buying a house is no small accomplishment, and it takes time to do it right. By following the tips listed here, though, you’ll be on a path to homeownership before you know it.

For further information on how to prepare for a mortgage, check out our Mortgage Resource Center. 

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Buying a Home? Ask Your Partner These 4 Questions First

Row of colorful garden homes with two stories and white pillars in suburban neighborhood of Fayetteville, Arkansas

Buying your first home is incredibly exciting, but there’s also more than a little bit of stress that comes with it. A house is a big purchase, and it brings a whole host of new hurdles beyond the initial price tag.

If you’ll be purchasing your first house with your significant other, one way to avoid some of that stress is to have a few important conversations before you even start your house search. Based on my experience buying a house with my husband, these are a few of the questions I’d suggest chatting about before you set out to find your perfect pad.

How Long Do We Plan to Live There?

You don’t have to set an exact time frame on your house purchase, but it’s a good idea to see if you’re both on the same page before you find a place to live. You should try to stay in the home at least until you hit your break-even year to recoup the purchasing costs. And depending on where the house is located, that could be several years down the road.

To determine whether you’ll be able to make that much of a commitment, have a frank conversation with your partner about your plans in the coming years. Do you see yourself building a family in this house? Are you both happy in your current jobs, or do you foresee a job search in the future that could make for a long commute? Life throws curveballs, of course, but talking about these things ahead of time will help you narrow down the type of house you both want based on your future goals.

How Much House Can We Afford?

This is one of the most important questions you should discuss with your significant other before buying a house. It’s not uncommon for people to get approved for mortgages with monthly payments that would, in actuality, be very hard for them to afford. Only you and your partner know how your finances work out on a monthly basis, so sit down and have a solid look at everything to fully understand how much money you can put toward a mortgage each month and still feel comfortable. You may also want to consult with a financial adviser together.

Keep in mind that putting down less than 20% of your overall home cost at closing will likely mean that you’ll have to pay private mortgage insurance (PMI) on top of your monthly mortgage fee. Luckily, there are plenty of resources out there to help you determine an affordable down payment, as well as tools to help you figure out how much house you can afford.

Are We Looking for a Fixer-Upper?

Some people prefer a house they can add their own touches to, while others would rather walk into a house that’s perfect for them without having to change a thing. Talk about this before your house hunt so you’ll know whether or not you’re both willing to put in the effort (and money) for any necessary updates if that’s the route you decide to go.

How Will We Save for Miscellaneous House Expenses?

When you own your own home, there is no end to the list of things you’ll spend money on. From leaks and cracks to peeling paint and clogged gutters, it seems like there’s always something that needs fixing. Of course, some of those things can usually wait, but in order to fix larger issues—especially those that need urgent attention, like plumbing problems—you’ll need an immediate flow of cash. Chat about how you plan to pay for surprises that crop up, and if you don’t already have an emergency savings account, start one today.

After you’ve talked over these four critical questions with your significant other and come to a decision that makes you both happy, it’s time to start looking. And when you’re ready to make an offer, check out our Mortgage Resource Center for more information on how to take that next big step.

Image: BlazenImages 

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