From high prices and interest rates to increased demand, now is a particularly challenging time to buy a home. But with no idea what the market could do next, becoming financially prepared to buy a home moves you one step closer to making it happen. In this how-to, we’ll walk you through the essential steps to financially prepare for this large purchase, even in the current housing market.
Before Looking at a House
Assess Your Current Financial Situation
Before embarking on the journey to homeownership, take a close look at your financial health. Calculate your monthly income, factor in existing debts and expenses, and evaluate your spending habits. Understanding where your money is going will help you create a realistic budget for homeownership. It also helps you find unnecessary expenses that could be routed, instead, to contribute to your house savings.
Determine Your Budget and Savings Goals
Based on your financial assessment, determine how much you can comfortably afford for a down payment, monthly mortgage payments, property taxes, insurance, and maintenance costs. A common guideline is the 28/36 rule, which states that your mortgage payment doesn’t exceed 28% of your gross monthly income, and your total debt payments shouldn’t surpass 36%.
Create a Savings Plan
With your budget in mind, create a savings plan to reach your down payment goal. Consider opening a separate high-yield savings account dedicated to your home purchase. Automating the transfer from your primary account to your housing fund will make it significantly easier to accomplish.
Boost Your Credit Score
Your credit score is the first thing a bank will look at to determine your qualified loan amount and interest rate. A strong credit score is key for securing favorable mortgage terms. Request a free copy of your credit report and address any errors. By law, you can receive one free credit report a year from the three primary credit reporting agencies. Pay down high-interest debts and avoid opening new lines of credit before applying for a mortgage. Remember that hard inquiries by banks, credit card companies, dealerships, etc. can lower your credit.
Reduce Unnecessary Expenses
Cutting down on unnecessary expenses can free up more money for your down payment fund. Evaluate your discretionary spending and find areas where you can save. This might include eating out less, canceling unused subscriptions or shopping more frugally.
Minimize Debt Load
Lenders assess your debt-to-income ratio when considering your mortgage application. Aim to pay down or eliminate high-interest debts like credit cards and personal loans. This not only improves your financial picture but also increases your borrowing capacity.
Save for Closing Costs and Emergency Fund
In addition to the down payment, factor in closing costs (typically 2-5% of the home’s purchase price) and have an emergency fund set aside. This fund acts as a safety net in case unexpected expenses arise after you’ve purchased the house.
Explore Down Payment Assistance Programs
Research local and national down payment assistance programs that might be available to you. These programs can provide grants, loans or tax credits to help first-time homebuyers bridge the gap between their savings and the required down payment.
Stay Informed About the Market
Monitor the housing market trends in your desired area. While saving for your down payment, keep an eye on property prices. This knowledge will help you adjust your savings goals and expectations accordingly.
Consult a Mortgage Advisor
Reach out to a mortgage advisor or lender to discuss your financial readiness and explore different mortgage options. They can provide insights into interest rates, loan types and qualification criteria.
Continuously Reevaluate Your Plan
As you progress toward your savings goals, periodically reassess your financial plan. Life circumstances can change and your goals might evolve. Adjust your strategy as needed to stay on track.
Maintain Discipline and Patience
Becoming financially ready to buy a house requires discipline and patience. Stick to your budget, maintain good financial habits and avoid making impulsive decisions that could derail your progress.
Preparing financially to buy a house in the current housing market involves meticulous planning, disciplined saving and careful consideration of your financial health. This roadmap provides only a glimpse into financially planning for a house. We suggest you consult a financial planning expert who can create a plan for your finances. This individual can utilize their expertise to work out a solution for your specific financial situation. You don’t have to do this alone.
For more information, please contact Judith Barnhard via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.