How to Get Your Finances in Order So You Can Buy a Home

Before you even start looking for a home, it’s important to get your finances in order. Buying a home is going to be one of the largest financial investments you’ll ever make, after all! Not only will this financially prepare you for homeownership, but it can speed up the entire home buying process, and let sellers know that you're a serious prospective buyer.

Step 1: Follow a Budget

If you don’t already have one, we highly recommend setting and following a budget. You can create a simple spreadsheet, or choose from one of many free templates available online. Not only does this allow you to assess your current financial situation, but it also allows you to plan for your new home expenses.

Factor in your income and estimate your expenses. Some of your expenses will be fixed, like your current mortgage payment or rent, car insurance, etc., while others will vary each month, such as utilities, groceries and entertainment costs.

Step 2: Automate Your Savings Contributions

This is probably one of the simplest things you can do, and similar to budgeting, if you aren’t already doing it, start now! Have a fixed amount of money automatically deducted from your paycheck and deposited into a “down payment” savings account.

Step 3: Be Credit Conscious

Your credit history, with information such as loans you have, and utility and rent payments you’ve made, is contained within a credit report. This information is used to generate your credit score, which can fall anywhere between 300 and 850. Credit scores below 400 are considered “low”, while anything above 700 is “healthy.” People with credit scores below 620 typically have difficulty getting loans.

In regards to buying a house, your credit score will affect whether or not lenders will approve you for a mortgage, as well as the interest rate you'll pay upon approval. The higher the score, the better the interest rate, which will lower your mortgage payments.

Below are some factors that can impact your credit score.

• Open credit card utilization rate
• Percentage of on-time payments
• Average age of your open credit cards
• Total number of accounts
• Total hard inquiries
• Derogatory remarks (including accounts in collections, bankruptcies, foreclosures and liens)

Step 4: Do Some Maintenance

You should always strive to earn more money than you spend, and if you find that your current budget is skewed in the wrong direction, you'll need to make some changes to cut costs.

When budgeting for the future, keep in mind that besides the mortgage payment, you have to factor in interest payments, property taxes and possibly private mortgage insurance. Also consider Homeowners Association dues if applicable.

Start reducing and paying off your debts. If you have multiple credit cards, try narrowing this down to only a couple, and try to pay them off in full every month (and on time!).

It's also a good idea to check your credit report for mistakes. If you do find mistakes, contact the reporting agency to have them make the required adjustments to your report.

Step 5: Get Pre-Qualified for a Mortgage

Now that you have a clearer picture of where you stand financially, you can get pre-qualified for a mortgage. Based on information supplied by you (income, assets, debt, etc.), a lender will calculate the size of mortgage they think you can afford. Keep in mind that this is just an estimate, to give you a better idea of what your approved mortgage amount might be.

Step 6: Get Pre-Approved for a Mortgage

Pre-approval is different than pre-qualification and much more accurate. When you go through the pre-approval process, you fill out a mortgage application, giving a lender permission to verify your sources of income and perform a check on your credit history. Once the review is complete, you’ll be provided with a specific mortgage amount for which you are approved. You’ll then receive a written conditional commitment for a specific loan amount, and the house-hunting can finally begin!

Getting pre-approved can also help expedite a transaction when you make an offer on a house, as the seller will be able to see that you're serious about buying and that they won't have to worry about funding falling through.

If you have questions about getting your finances in order before you buy a home or would like to learn more about the home-buying process, call the William Raveis Real Estate team at (941) 894-1255 or message us!