Home Buying: Prepare NOW, Before It’s Time To Buy

This is the 2nd entry in our Home Buying series. There are links to the other entries at the end of this article.

So you want to buy a house. Or maybe you don’t yet, but you think you might someday soon. Or maybe it’s not even on your radar yet. It’s still good to understand what you need to do
before you start looking at houses so that when you decide you’re ready your financial situation won’t hold you back. These things take time, deciding to get started one month before you want to buy a house won’t cut it.

(1) Get your credit score in shape. Your credit score is one of the biggest factors in determining if you qualify for a mortgage, and what rate you’ll get if you do. The better the rate, the less interest you’ll pay and the lower your monthly payment will be. Aim for 700 or better. It takes time to improve your credit score so start now. If you wait until you’re ready to buy a home it could easily be too late.

(2) Start paying down existing debt. Your debt-to-income ratio needs to be below 45% to qualify for a mortgage and should be closer to 30% to get the best mortgage possible. It takes time to pay off debt so start NOW.

(3) Save for a down payment. It’s easy to set up a designated savings account and use it just for saving for a down payment if you want to buy a home in the next few years. You’ll need anywhere from 5% to 20% of the home price and the more you can put down, the better deal you’ll get.

(4) What’s your price range? Owning a home isn’t just a monthly mortgage payment. There’s homeowner’s insurance, property taxes, HOA or condo association fees, and ongoing maintenance and repairs to consider. Maintenance alone can cost you an estimated 1-2% of the value of the home, every year. You should aim to keep all of those costs together to less than 30% of your monthly take home pay. 25% or less is even better. Remember that there’s no wiggle room in this after you buy the house. You’ll be making these payments every month for a long time. Your future self will thank you for not stretching your housing budget to the breaking point. If renting is cheaper there’s nothing wrong with renting. You have to decide what’s right for you, and knowing what you can afford (which is not the same as what you might qualify for) is the first step.

If you’re ready to put yourself on the path to home ownership these steps are great first steps. And even if you aren’t sure home ownership is in your future, these steps are still good for your overall financial health.

Keep reading about home buying at the links below!

Home Buying #1
You need to know the basics.

Home Buying #3
Understanding the different stages of the mortgage process.

Home Buying #4
After you make an offer, but before you close, there’s a lot to do.

Home Buying #5
Congratulations, you’re a homeowner! Here’s what to expect after you buy.