Deciding to buy a home is considered a huge milestone in life – and there’s a reason it is. In most of our lives, it will be the biggest purchase we ever make. It’s a commitment, an investment, and a dream for many. Sure, there are a ton of decisions that come with buying a home (what kind of home do you want? How much do you want to pay? How will you decorate?). But what about the decision to actually buy the home?
I’d like to say that we thought long and hard about whether we should buy a home, but looking back now, I think we should have tapped the brakes a bit and done more to better prepare ourselves for homeownership. From applying for the mortgage, to closing on the home, to now owning the home for six months, I can tell you, these are the actions you should take before deciding to buy a home.
#1 Save, save, save more money.
If you’re concerned with whether you will have enough money to afford a home, take a step back and consider saving more until you are more comfortable with your financial situation. First, you need to have enough saved for a downpayment and closing costs. That will most likely be more than a few thousand dollars. On top of that, you want to make sure you have money left over for emergencies or those pesky costs you may not have considered – especially if you are moving from an apartment to a house. You do not want to drain your savings on buying a home and paying moving costs and then have no money left to actually enjoy living in your home. If you are concerned with money at all, give yourself more time to save.
For a few ideas on saving, read my post on how I saved $10,000 in one year!
#2 Pay off some debts.
When you take on a mortgage, you want your debt-to-income ratio to be less than 36%. In fact, according to Zillow, if your debt-to-income ratio is higher than 36%, it can be much harder to qualify for a mortgage. Debt-to-income ratio is how much you are paying in debt compared to how much you make each month. It helps mortgage lenders see how you can manage paying a mortgage, while also paying your other debts and living expenses. Not only is it important to keep it low when applying for a loan, it is also important to keep it low so you can live comfortably.
You can determine your own debt to income ratio by dividing your monthly debt by your monthly income. Or you can find a debt-to-income ratio calculator on many financial sites.
#3 Work on your credit.
You want your credit to be in a good standing before applying for a mortgage because lenders take into consideration credit history and credit score when determining whether to loan to you. Plain and simple, your score and history will tell them whether you will be a responsible borrower or not. If you even qualify for the loan, your rates or costs may be higher since you are a “riskier” borrower.
Here’s an example using FHA loans. To be able to have a low downpayment (about 4%) your score should be at least 580. You may still be able to get a loan with a score that is lower than 580, but you’ll have pay a downpayment of at least 10% on the home. On a $100,000 home, you could have a downpayment of $4,000 or $10,000. Which would you want?
If you have a low score, work on getting that up before you decide to buy a home.
#4 Simulate your new budget.
Find out if you’ll be able to afford a mortgage payment, property taxes, homeowner’s insurance, and high utilities by simulating your new budget. Do some research and estimate the higher costs. Then, try to live on this new budget for a few months. You’ll be able to see what life will be like and it will help you determine how much you can actually afford for a monthly mortgage when you do decide to buy a home.
#5 Think about the future.
When you are caught up in the possibility of owning a home, it can be hard to look farther into the future past the home buying process. But, if you’re thinking of buying a home, it is important to have some sort of idea of where you want to be in life a few years down the road. I understand unexpected things happen in life, but you need to plan ahead a little. Are you happy at your job and do you plan to stay there for a few years? Because changing your job may mean taking a pay cut or needing to move out of state. Do you think you will have kids in the near future? If so, you may need to purchase a bigger home than you originally budgeted for. Are you dating someone seriously and you think you’ll wind up living together? You may want to take their opinion into consideration.
Owning a home is a great experience, but it is a better one when you are prepared for it – both financially and emotionally.