Preparing Your Finances for Homeownership

As exciting as buying a home is, it is also a serious decision that requires quite a bit of planning. Therefore, long before you make an offer on your dream property, know how much you can afford to pay for housing costs, accumulate enough cash for pre-purchase expenses, and make sure your credit history and score is attractive to lenders.

Determine a comfortable monthly housing payment
One of the most important steps in preparing for homeownership is understanding how much you can afford to pay for monthly housing costs. Many people jeopardize their financial security by overestimating the amount they can realistically handle.

Determine your comfort zone by analyzing your cash flow. List and total your monthly expenses, then subtract that figure from your monthly net income. If you’re like most people, you’ll need to track your spending for at least a few months to be accurate.

Your mortgage payment plus all related housing costs should fit easily into your budget. Project for maintenance and increased utility expenses, especially if you intend to move into a larger home than you are in now. As a rule of thumb, total housing costs (mortgage, property taxes, homeowner’s insurance, utilities, upkeep, etc.) should be no more than 35 percent of your net pay. Therefore, if your household income is $2,200 per month, a safe figure is $770. If its $3,900 a conservative sum is $1,365.

Save for pre-purchase expenses
Before you buy, you will need enough cash for a down payment, closing costs, and at least a few months’ worth of mortgage payments in reserve. Consider what you may need for such extras as moving costs, repairs, and furniture too.

In most cases, the down payment will be your biggest expense. While putting 20 percent of the purchase price down may not be required, the more you put down, the less your mortgage payment will be and the better loan you may get. If your down payment is less than 20 percent, you may either have to purchase mortgage insurance until you build up 20 percent in home equity, or obtain a second loan to cover the remaining 20 percent. Closing costs are often between three to five percent of the purchase price.

It can take months or even years to accumulate enough for the home you want, so if you don’t have what you need saved now, start setting aside money on a regular basis. Break down the goal amount by your purchase time frame. For example, let’s say you need $8,000 to buy a home one year from today. You currently have $4,500, and so need an additional $3,500. If you set aside $292 per month beginning today ($3,500/12 = $292), you will reach your goal.

Get your credit in order
Your credit rating is a primary factor in qualifying for a mortgage, so pull copies of your report from Experian, TransUnion, and Equifax at least three months before you intend to buy. You can get a free copy of your credit report from each of the bureaus once every 12 months from Annual Credit Report Request Service ( Read each report carefully to make sure all information is accurate. Errors can significantly impact your ability to get a desirable home loan. If there is incorrect information on your reports, immediately dispute it with the bureaus. This process can take several months.

Also know your credit scores. The most commonly used score is the FICO, which was developed by Fair, Isaac and Company. It ranges from a low of 300 to a high of 850. In general, the higher your score, the easier it will be for you to get a mortgage loan with a low rate of interest.

To access your scores, either purchase them as you get your free reports from Annual Credit Report Request Service, or pay for them when you buy your reports from the credit bureaus:

If the information on your report is negative but accurate, take action to improve your credit. It may make sense to delay home purchase until your credit report looks positive to lenders. You can make a major difference to your score in as few as 12 months by using credit regularly, paying all accounts on time, repaying any collection accounts you may have, and keeping balances at zero or well under the credit limit.

After you know what you can afford to spend on a home payment, you’ve saved enough for the property you want, and your credit is attractive to lenders, you are ready to begin shopping for that special piece of real estate!

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