How to Prepare Your Budget for Buying Your First Home

You're going to need more than just a down payment.

With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it’s time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.

One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler’s responses, edited for length.

What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?

First of all, there’s a whole lot more that goes into buying a home than many people realize. I’m actually going through the process right now, and believe me, it ain’t like walking into a leasing office and signing up for an apartment.

When you’re preparing your finances for buying a house, here are a few steps you need to take first.

  • Get your credit in shape: The higher your credit score, the better deal you’ll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor’s note: If you’re not sure where your credit stands, we’ve got you covered. You can get your free credit report snapshot on Credit.com, and it’s updated every 14 days.]
  • Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it’ll come with higher monthly payments. Plus, typically when you put down any less than 20%, you’ll need to have private mortgage insurance, which is another monthly bill to prepare for.
  • Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months’ worth of mortgage payments.

In terms of your monthly budget once you’re in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.

What Are Things Renters Don’t Have to Budget for but Homeowners Do?

Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that’s just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it’s a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you’ll need to cover all of your expenses each month.

Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can’t work for a period of time for whatever reason.

A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.

The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road

What Are Tips for Transitioning Your Budget From That of a Renter’s to a Homeowner’s?

Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won’t have the luxury of spending once you own that house. Send it directly into savings so you don’t give yourself a chance to spend it.

How Can Homebuyers Make Sure They’re Not Biting Off More Than They Can Chew?

Just because you can qualify for a bigger house doesn’t mean you should buy one. The financial risks are extremely serious.

No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren’t prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can’t pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you’re giving up retirement savings and everything else that comes with being financially independent.

Bottom line: Buy less house than you can afford. And even on a less serious scale, you don’t want to live in a house that you can’t afford to furnish, or you can’t afford to take vacations because you have nothing left to spend or save each month.

Image: Geber86

The post How to Prepare Your Budget for Buying Your First Home appeared first on Credit.com.

5 Home Maintenance Tasks That Can Save You Money

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Home maintenance can be time consuming and expensive and, as a result, may be one aspect of homeownership you tend to avoid. But there are some easy and cheap DIY tasks that can actually save you money and time in the long run. By spending a weekend performing some simple maintenance tasks around the house, you could reduce your bills or avoid costly contractor fees in the future.

1. Fixing Leaks

Leaks don’t seem like they should cost that much. After all, it’s only a few drops of water at a time. But according to the Environmental Protection Agency, an average household’s leaks can annually waste more than 10,000 gallons of water and artificially inflate a water bill by 10%.

Fixing leaky faucets and toilets can cut back on the wasted water. It’s environmentally friendly and it saves you money. Win-win.

2. Cleaning Gutters

Your gutters are an important home protection system. When it rains, gutters carry water off and away from your home. If your gutters and downspouts are clogged, water builds up on your roof and collects around the foundation of your home. Over time, this can lead to leaky roofs, sagging gutters or even flooded basements. At this point repairs become expensive.

You can prevent this damage by cleaning your gutters of leaves and other debris at least once a year (more frequently if you have overhanging trees). All you’ll need is a few simple tools which may include a ladder, gloves and a hose. It could also pay off to check gutters after strong storms.

3. Replacing HVAC Filters

Your HVAC system circulates air throughout your home and regulates the internal temperature. Unless you live in a moderate climate, your HVAC system most likely uses more energy than any other home system or appliance.

HVAC systems use air filters or screens to prevent larger dust particles from clogging up the works. When these filters become dirty, air flow is reduced and the system has to work harder. Luckily, these air filters are fairly cheap and easy to swap out. You’ll want to switch them out every few months (more frequently if you have pets or a large family).

4. Maintaining Smoke Detectors

Early detection of smoke or a fire could save your life. It could also save your home and your property — for instance, if something starts smoking in the oven, you have a shot of preventing a major fire before it even occurs.

Don’t wait for the telltale “beep” to service your smoke detectors when they’re low on battery life. Instead, check your smoke detectors regularly, ensuring they work properly, and replace batteries or the unit itself when needed.

5. Programming Your Thermostat

When you set and forget your thermostat for long periods of time, your home could be working hard to heat or cool itself while no one is there. When you’re asleep or away from home, you can save money on energy costs by reducing your HVAC system’s workload.

It’s difficult to remember to manually set your temperature before you leave the house. Programmable thermostats can be set around your schedule, and reduce the amount of wasted energy spent cooling or heating an empty house.

As you take steps to repair things around your home, make sure you’re doing so in a way that keeps you on budget, as it isn’t worth going into debt over. You can see how doing DIY projects are impacting your financial goals, like maintaining a good credit score, every 14 days for free on Credit.com.

Image: Yuri_Arcurs

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Women Are Better Than Men at Paying Their Mortgages

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Women pay more for mortgages than men, but that doesn’t mean that they’re a higher risk when it comes to missing mortgage payments. In fact, a new study from the Urban Institute says that women actually are less likely to miss a payment, compared to men.

The recent study looked at all types of borrowers, including single men, single women and couples. They compared data from 13 million women and 17 million men across a vast range of socioeconomic factors. They found that “if a male-only (most likely a single man) borrower has a 6% probability of default, a female-only (most likely a single woman) borrower with the same characteristics would be expected to default at a 5.8% rate,” according to the study. That means women are .2% better at not missing payments.

“This is the first step in saying the barometer is consistently not accurately predicting whether women are able to pay their mortgages,” Sheryl Pardo, a spokesperson for the Housing Finance Policy Center at the Urban Institute, said.

The two basic reasons why women have higher interest rates is because they have more subprime loans, and their credit profiles aren’t as good. When anyone applies for a loan, the lender looks at a series of predictors to determine how likely that person is to default. And because default risk and mortgage rates go hand-in-hand, experts at the Urban Institute are saying assessments need to change because they’re not matching up.

“Women’s predictors are lower, which suggests she’s not going to do as well,” the Urban Institute said. But those predictors are wrong, the institute continues.

“They’re not predicting accurately,” Pardo said. “Women do better than their characteristics say they should do. And, in fact, they perform better than men.”

Women borrowers generally have more debt to income, which affects their credit scores. They also have less income than men income ($68,000 versus $95,000 for men.) Bundle these things together, and it means they typically must pay higher interest rates for men: 5.48% versus 5.41%. Moreover, women have a higher denial rate. It puts them at a greater disadvantage.

“Given that more than one-third of female-only borrowers are minorities and almost half of them live in low-income communities, we need to develop more robust and accurate measures of risk to ensure that we aren’t denying mortgages to women who are fully able to make good on their payments,” Pardo said.

Using FICO scores might be more accurate and better at predicting actual performance, according to Pardo.

There are many types of debt a person can carry, and a credit score considers just how much debt you have compared to your credit limits. If you’re wondering how your mortgage payments are affecting your credit scores, you can get two free credit scores, updated every 14 days, on Credit.com.

Image: Xavier Arnau

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Want to Buy a Home in the Next 5 Years? 5 Things You Should Do Now

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Buying a home is a lot like running a marathon. Very few people can just decide to up and do it in the next day or two. It takes preparation, patience and perseverance.

If you’re looking to buy your first home in the next 5 years or so, you’ll likely need to start now to ensure you’re in the proper financial shape to do so. To complete the marathon metaphor, here are six things you’ll need to do to help get you to the homebuyer finish line.

1. Improve Your Credit Score

A lot of first-time homebuyers are holding off on buying in hopes they can get a better rate once they improve their credit scores, according to a recent Experian survey, and that’s smart. While you don’t need top-tier credit to get a mortgage, an improved credit score can not only help you get approved quickly for a mortgage loan, it can also make better interest rates available to you.

Most conventional lenders look for a credit score of at least 640, but a credit score of 620 is often a common credit score benchmark for government-backed loans (like the Federal Housing Administration, U.S. Department of Veterans Affairs and the U.S. Department of Agriculture).

If your score is subpar, and even if it isn’t (everyone’s credit can be improved), you can start improving your credit scores by using Credit.com’s free credit report card, which offers you two free credit scores, updated monthly, plus your very own credit report card that tells you how you’re doing in the five key areas that are included on your credit report and determine your credit score — payment history, debt usage, credit age, account mix and inquiries.

It’s also a good idea to pull your credit reports, which you can do for free every year at AnnualCreditReport.com. Be sure to review it closely for any errors or discrepancies and then dispute any items that are inaccurate.

2. Find Out What Can You Afford

Getting pre-approved for a loan can help you determine how much mortgage you can qualify for, but that doesn’t necessarily mean that’s what you can afford. That’s because lenders look at your credit, income, debts and assets, but don’t take into account your own personal spending and savings habits (you can use this calculator to help you determine just how much you can afford).

When it comes your income, lenders prefer that you’ve worked in the same or similar field for at least 2 years. If that’s not your case, it’s a good idea to explain your situation in writing, and be sure to include any employment gaps. Lenders also have to show that your income supports your mortgage and any other debt payments. If those debts exceed 45% of your income, you might not qualify for as much house as you might like.

Once you know how much you can comfortably afford and what kind of mortgage you can qualify for, you’ll have a better idea of how much you’ll need for a down payment.

3. Save Your Down Payment & Closing Costs

The bottom line with a down payment is the more you can put down, the less you’ll have to borrow, so your minimum monthly payments will be lower. Also if you have only a very small downpayment (5% or less, for example), you’ll qualify for fewer types of mortgages and could also be charged a higher interest rate.

While most lenders would like to see a 20% down payment, some mortgages are available for as little as 3% down. And then there are the closing costs, the fees paid at the closing of a real estate transaction, when the title to the property is transferred to the buyer. They typically range between 2-5% of the purchase price.

Whether you’re able to save for your down payment and closing costs can be a good indicator of whether you’re ready to own a home. If you can’t save enough for a 3-5% down payment, are you really ready for the financial responsibilities of owning a home? Will you be prepared when the furnace breaks or when the dishwasher needs to be replaced? There are a lot of expenses, big and small, that come with owning a home, not just the down payment, mortgage and closing costs.

4. Have an Emergency Fund 

You’ll want to be prepared for unexpected emergencies in your new home, and that means having enough savings to cover some of the big expenses. Sure there are home warranties and homeowners insurance to cover some things, but say, for example, a huge rain storm causes your new home to flood and you don’t have flood insurance. You’re going to be stuck with the costs of cleaning up the damage, remediating any mold or mildew issues, replacing sheetrock, mouldings and flooring — not an inexpensive experience.

Having a savings account with at least several months income in it can ensure you have peace of mind and a solid cushion should things go wrong.

5. Find a Great Realtor

You’re more than likely going to be spending a lot of time with your Realtor when you’re looking for your new home, so it’s important that you like the person. More importantly, having a knowledgeable Realtor who understands your market, knows the neighborhoods, has great connections with inspectors and contractors and has seen his or her share of shady real estate dealings is going to be immensely helpful in your search.

Go ahead and meet with several Realtors that friends and relatives might recommend. Choose someone you feel is a good fit and who you think you can trust and build a relationship with. And go ahead and look at homes now so you can get to know the market a bit better, even though it may seem like the house of your dreams is going to get away if you don’t go buy right here and right now. Your Realtor can make a big difference in finding the right home and having a smooth closing.

Image: Justin Horrocks

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How Many Americans Have Gone Through Foreclosure?

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During the Great Recession, many Americans lost their homes due to foreclosure. In fact, according to real estate data company RealtyTrac, there were 6,324,545 completed foreclosures from January 2006 to April 2016.

“It is a big number,” Daren Blomquist, Senior Vice President of RealtyTrac said in an email. “Normal would be around 250,000 bank repossessions per year. These last 10 years represented the biggest loss of home ownership and shifting of real estate wealth since the Great Depression.”

The Current Status of the Housing Market

The market has improved, but that doesn’t make it immune to foreclosures. (You can see the 10 states with the biggest foreclosure problems here.)

“The foreclosure crisis is largely behind us, although still certainly lingering in certain pockets,” Blomquist said. “Unfortunately, we are already seeing signs of another housing bubble in certain markets, so people should continue to be cautiously optimistic when it comes to the housing market.”

But Blomquist says people who can truly afford to buy a home may still benefit from it.

“Homeownership done responsibly is still one of the best ways to build wealth,” Blomquist said.

What a Foreclosure Can Mean for You

“Foreclosure will obviously create a crater in a credit report for some time,” Troy Doucet, attorney with Doucet & Associates in Columbus, Ohio, said in an email. “However, foreclosure is not the end of the world. Those with foreclosure in their credit past will find their credit scores slowly improve as time passes. After a few years, they may even be able to buy another house.”

If you default on a loan or go through a foreclosure, it will appear on your credit report for seven years. But you can work to improve your credit score. (Consider these steps to fix your credit.) To see how your mortgage payments are affecting your credit you can take a look at your free credit report summary, updated monthly, on Credit.com.

More Money-Saving Reads:

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What to Look for In Your Homeowner’s Insurance Policy

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If you’ve been a renter for most of your adult life and you recently bought a home, making the switch from a renter’s policy to a homeowner’s insurance policy may seem daunting. Now it’s about more than just your possessions — if something breaks or goes awry in your home, it’s totally up to you to fix it … but will your homeowner’s insurance help bail you out?

When doing your research there are some important things to keep in mind. If you’re currently shopping around for a homeowner’s policy that’s right for you, be sure to check on the following points to see if they’re included:

1. Are all of your possessions covered, and under what circumstances?

The whole point of having homeowner’s insurance is to safeguard your possessions and your overall home from certain environmental hazards and vandalism so that if something were to happen, you aren’t held liable for replacing everything at full value. In actuality, though, your homeowner’s policy will come with certain restrictions and stipulations in terms of what they’ll cover you for. For example, most common policies should cover you for any damage to either your possessions or your property in events like storms, fire, theft or vandalism. Get all the details on what events your policy will cover you for before signing up. A good policy should also provide you with shelter costs in the case of an emergency as well, so if you are temporarily displaced from your home because of a flood or fire, the insurance should foot the cost of a hotel bill.

2. What isn’t covered?

It’s fine and dandy to listen to a list of hazards for which your possessions are covered, but it’s always a good idea to keep in mind some of the environmental hazards that might be missing from your policy list. For example, depending on where you live in the country your policy might cover you for windstorms, but if your area is prone to tornadoes, you might consider paying for some additional coverage to be sure you’re safe. On the flip side, some companies actually exclude tornadoes and hurricanes from policies in high-risk areas, so you’ll definitely want to be sure you know the details of what your policy does and doesn’t cover as it relates to the typical weather in your area. Water damage is another big one to check in on. Do your research to find out if flood damage or earthquakes, etc., are common in your area, then make sure your policy has you covered (it typically isn’t) and check to see if additional coverage in this area might benefit you, as well.

3. What is the liability coverage like?

As a homeowner, you’ll also be responsible should someone injure themselves on your property and decide to sue. Check with your homeowner’s policy to make sure you’re being provided with liability coverage in case this happens to you.

4. What happens when your possessions are traveling?


Just because your policy is a homeowner’s policy doesn’t mean that you stuff should necessarily always be in your home to be covered. Whether it’s an item that was stolen from your car or a laptop bag that was lost in transit, find out if your policy covers your items when they’re outside of your home, as well.

5. Beware of bugs and infestations


You’d be hard-pressed to find a homeowner’s policy that covers things like bedbugs and termites, since most companies just consider dealing with this type of thing par for the course of owning a house. There’s really not much to be done about it, other than to recognize that these things aren’t covered, and to start saving up in a separate savings account for any household things that might go wrong that you’ll have to pay for out of pocket.

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