How to prepare your finances for the purchase of a home by building a nest egg
Through Kaylie Reese.
Buying a home is one of the most important financial decisions you’ll make in your lifetime. This is why it is essential to start planning early. Whether you are building, buying a move-in home, or a century-old repairman, there are many costs to consider well before you make your offer.
My husband and I are preparing to enter the housing market. It will probably be a few years before we hold the keys to our first home, but part of the reason is that we take the time to make sure that the decisions we make now will prepare us well for our financial future.
Here are some financial tips we use to guide us as we move forward on this journey.
Take a serious look at your financial situation
The first thing you will want to do is understand your finances.
Remember, when you apply for a home loan, lenders look at the current state of your finances, not where you think you may be in the future. In addition, your financial situation includes income, your credit score, and identification of any unpaid debts you may have, such as student loans, vehicle or credit card payments, as well as your repayment plan.
When applying for a mortgage or home loan, it is important to know that your debt to income ratio will come into play. This ratio is a calculation of monthly earnings versus estimated debt payment. The lower the number, the better, in the eyes of lenders.
Another important figure to watch out for is your credit score. Some lenders require a minimum credit score to qualify for a mortgage, so it’s good to have a sense of where you are starting out. A credit score, roughly speaking, is an estimate of the likelihood that borrowers will pay off their debts on time. The closer your score is to 800, the more lenders will assume that you will pay off your debts on a set schedule.
This year, until April 2021, you are entitled to a free credit report every week from the three national credit bureaus, according to consumer.ftc.gov. These credit bureaus (Equifax, Experian, and TransUnion) also allow you to check your credit report for free once every 12 months. Other ways to monitor your credit score without a specific request, which can affect the score, include apps like CreditKarma and Mint Money Manager.
Speak with a mortgage lender
Many banks have in-house financial and mortgage advisors who provide services that include reviewing your specific financial situation, which can help you plan ahead for a future purchase or prepare to sign on the dotted line for become the official owner. Speaking with an expert is especially important for first-time home buyers, who may be eligible for certain tax exemptions or other flexible loan options.
If you’re wondering where to start, consider the Maine State Housing Authority ( mainehousing.org).
Be realistic about which corners to cut
Before I go any further, I must admit that I am a huge fan of home improvement shows and have some experience working with a few basic power tools, repair materials, and paint. The consequence of this could be that I might be more willing to bite more than I can chew when it comes to spotting a superior fixer with a low initial cost. Other days I’ll admit that a move-in home looks fabulous – even if it comes at a much higher price point.
When it comes to finding a home, you need to be realistic about what you are capable of and willing to do when it comes to repairing and maintaining your home. Plus, safety is crucial, and many home updates require permits and inspectors for larger projects to ensure you and future homeowners are out of harm’s way.
Build your down payment
It goes without saying, but the more you can prepay for your home, the better.
When saving for an expensive item, like a down payment for the house, it’s important to take a look at your budget. First, identify your monthly expenses versus your income. Separate your expenses into categories: recurring bills or paying off debts, which are necessities, compared to your weekly lunch habit. A great way to track your spending is to use secure phone apps linked to your bank account, such as Mint, EveryDollar, and Honeydue. If you don’t have much money left after spending, consider cutting back in the areas you can.
When working on your budget, identify how much you can easily set aside each month for that down payment. Categorize this amount as you would for recurring invoices. Finally, stick to this commitment.
One way to ensure that this amount is set aside weekly or monthly is to make automatic deposits to a separate savings account or club account. Most employment billing offices are ready to help you define where your paycheck is going. It’s a great way to define it and forget it, when it comes to saving for a home, reducing that extra step of transferring money yourself.
Another option to consider is to focus on how to increase your income. Maybe it’s time to ask for that raise, start a side business with low overhead, or take another part-time job on weekends for a while.
Also consider investing some or all of a one-time income increase, such as a vacation bonus or a tax return, into your down payment.
The traditional rule of thumb has been to save around 20% on your down payment – an amount that has kept many potential buyers from taking the next step, according to NerdWallet’s 2020 Homebuyers Report, the results of which were analyzed from an online survey conducted by The Harris Poll.
However, there may be other options for first-time home buyers, according to the Maine State Housing Authority. Several options that offer little or no down payment for first-time home buyers include the Federal Housing Administration (FHA) loan, which helps low-income individuals and families purchase a home; loans guaranteed by the United States Department of Veterans Affairs (VA), for veterans and their American spouses; and Rural Development Loans (RAs), which are backed by the US Department of Agriculture for housing in rural communities.
In addition to settling your down payment, it is essential to set aside a portion of your savings for closing costs and other “hidden expenses” including, but not limited to, setting up utilities. , home maintenance and repairs, and home insurance.
Eyes on your own journey
It can be very easy to fall into the trap of comparing someone else’s home buying experiences with your own. My last tip? Do not do that.
We all have different opportunities and woes that pave the way for this next step, and the housing market is constantly changing. While your path to homeownership may be easy for you, it can be difficult for others, and vice versa.