Home sales in the US are skyrocketing as interest rates remain at historically low levels. In fact, Zillow expects nearly 7 million existing home sales this year – most since 2005. With so many potential homebuyers in the market, you may also be wondering if it’s time to take the plunge into home ownership. However, before you start looking for a home, there are some financial steps you should take to put yourself in the best buying position.
Here are 3 tips to get financially fit to buy a home.
Build up your credit again.
Your credit plays an important role in whether or not you qualify for a mortgage loan, as well as the terms and rate that you are offered. And the better your credit, the faster you will be approved and get the best loan terms at the best interest rate. If you take steps to upgrade your credit before you even start looking for a home, you are in the best position for mortgage applications. You can do this by paying off debts, especially high-yield credit cards, not opening new credit cards, or making purchases with large tickets like a car or furniture. It is also recommended that you check your credit report for any possible errors that could affect your creditworthiness, as this gives you an opportunity to dispute any mistakes.
You can even use a Credit Builder loan available through apps like Self to restore your credit. Instead of receiving money up front, make small monthly payments into your account over a period of 1 to 2 years while Self reports your on-time payments and the balance to all three credit bureaus. At the end of the term, your payments will be activated in the form of savings – minus a few small fees – while you build up your credit again.
Reconsider your budget.
Potential homebuyers often look to the most expensive homes they can afford and underestimate all of the additional costs associated with the monthly mortgage payment, including property taxes, homeowner insurance, and other fees. Not to mention, buying a larger home means planning on more expensive bills, as well as maintenance or repairs. Including all of these elements in your monthly budget is crucial in preparing for home ownership success. Otherwise, you could lock yourself into a lifestyle that doesn’t offer a lot of flexibility, which can lead to stress or debt.
Your monthly housing benefit payment should average around 25 percent of your take-home salary or, if you are buying with a partner, a combined take-home salary. Once you’ve figured out how much you can comfortably spend on a monthly housing benefit payment, it’s time to set your home purchase price and make sure you don’t go over your maximum budget. If you need help estimating a monthly mortgage and other real estate costs, you can find mortgage calculators online at sites like MortgageCalculator.org.
Save, save, save.
Before you even start reading real estate ads, you need to save money on a down payment. The more money you invest, the better your chance of qualifying for a mortgage loan with the best interest rates available at the time. On the flip side, a smaller down payment makes you look like a riskier borrower as your credit-to-value ratio remains high. Although lenders may still give you approval to borrow money with a lower down payment, you will likely be charged a much higher interest rate, resulting in a higher monthly payment and costing you much more over the life of the loan – like tens of thousands of Dollars more! Not to mention, you may have to pay a separate personal mortgage insurance fee for a down payment of less than 20 percent of the home purchase price.
So cut down on your expenses and think about how you can increase the savings on your way to buying your first or next home. From selling unwanted items to taking on sideline jobs to drastically cutting back on discretionary shopping, anything can work together to increase your down payment goal and put you in the best position to buy your dream home.
Andrea Woroch has partnered with Self to promote positive credit habits and help consumers take control of their financial futures.