Buying a home is an expensive proposition. Down payments and closing costs can easily run into the tens of thousands of dollars — and that doesn’t even factor in the fact that you’ll have home maintenance and mortgage payments to make when the dust settles after your big move. I work with folks a year or more in advance sometimes to help them prepare for that next step.
Nevertheless, the inherent value and family-friendly nature of owning your own house make homeownership a consistent goal for many 21st-century individuals. If you’re thinking of buying a house in the not-too-distant future, here are a few tips and suggestions to help you pull your finances together in preparation for the exciting-yet-expensive adventure that lies ahead.
Start with Your Credit
When it comes to getting ready to buy a home, one of the top long-term preparation considerations is the current state of your credit score. This should be addressed as soon as possible as it can take time to raise a credit score if that’s what needs to be done.
Clint Proctor, writing for Business Insider, breaks down the credit stipulations for a new home thusly:
- While the minimum credit score to qualify for a mortgage will vary depending on the lender and loan type, in general, a conventional loan requires a credit score of at least 620. However, there are other loan types, such as an FHA or USDA loan that may approve you at a lower score.
- If you can get your credit score as high as 740, you tremendously increase your chances of qualifying for the best interest rates available.
So, the two questions to ask here are “is my score high enough to qualify for a mortgage?” and “Do I want to wait until I can get the best interest rate?” If your credit score poses problems for either of these questions, you can take steps to improve that score, such as:
- Making all of your payments in full and on time.
- Paying down outstanding debt.
- Adding new credit lines that lower your credit utilization ratio.
Don’t Forget to Save
A good credit score can help you find success with lenders, but you’re still going to want to have as much cash as possible saved to cover the expenses associated with purchasing and moving into your new home. These include things like:
- Down payments, which can vary dramatically depending on the kind of loan you’re pursuing.
- Closing costs, which typically are between 2% and 5% of the cost of the home.
- Moving expenses: This can include anything from renting moving trucks and buying packing tape to hiring entire moving companies.
To offset as many of these expenses as possible, it’s important to create a clear budget and then stick to it. Along with essentials and flexible spending, a good budget takes into account financial goals — like saving up for a new house.
In addition to a solid budget, consider picking up a side gig or funneling tax deductions toward both your savings and paying down your debt. The former can help with closing costs while the latter can boost your credit score.
The home-buying process can be stressful, as can packing up and moving your entire life into a new space. If you’re buying a home with a significant other, it’s important to maintain clear and consistent communication as you navigate the process and manage your finances together.
Make sure to talk everything out, be transparent with one another, and work with your financial strengths. By keeping up proper lines of communication, you ensure that you’ll be able to support one another as a team throughout the process.
Set Reasonable Expectations
No matter how well you prepare for your next move, it’s important to set reasonable expectations when it comes time to set your plan into action. This obviously applies to things like what you hope to get out of your new home and how you plan to sell and move out of your current residence.
Additionally, though, it’s important to set reasonable financial expectations. For instance, even if you’re happy with your credit score, it may not be high enough to net you the interest rate that you were hoping — and that’s okay. If that happens, simply sit down with your partner and discuss your options.
Another example could be that you’re denied a home loan in the first place. If that happens, don’t panic. Instead, once again, consider why you were denied the loan — perhaps you have a low income or recently changed jobs — and then start working toward ameliorating the situation.
Preparing for the Future
The simple fact that you’re looking for resources to prepare for such a big life decision indicates that you have a bright future ahead of you. Sound financial planning is always an excellent way to pave the way for eventual success when you finally decide to begin shopping around for your next home.
So start saving, boost your credit, and set up those lines of communication. And above all, remember to maintain rational, realistic expectations. Equipped with these tools, you’ll be able to ace the homebuying process and come out with healthy finances, a great interest rate, and above all, a wonderful new home to live in.