Preparing to buy a home begins long before you start scanning the listing sites or reaching out to a realtor. The last thing you want is to buy a house you can’t afford, underestimate your monthly expenses or put too little down on your future home. So if homeownership is on your radar, here’s what you can do to get prepared:
1. Determine how much you can really afford
This step is where a lot of people fall short, and it’s the most important in terms of owning a home while still thriving financially. To find out what you can realistically afford, track all of your monthly expenses and subtract that from your net monthly income. Consider everything; your debt, savings you want to acquire, and future goals. Err on the side of overestimating your expenses and underestimating your income. Also consider how much you have in emergency savings, what you would do if you or your spouse lost a job, and whether you’re planning to expand your family or change your workload in the future. All of this planning will help you buy a home that you can comfortably own, while still saving and living the life you want.
A good exercise is to live for a few months like you’re already paying a mortgage. Figure out roughly what you would be paying in a mortgage payment, plus utilities, and put that money in savings. If you’re renting, you can just add the additional money you would be spending per month to your rent payments. That will allow you to see what day-to-day living would be like with house payment.
2. Prepare for closing costs
A 20 percent down payment reduces your monthly mortgage payments, so while it may not be mandatory, it’s a good goal to strive for. It also gives you something substantial to save for, giving you better insight into your realistic personal savings rate.
When you close on your house, you’ve got more to consider than just a down payment. You’ll also be paying closing costs and inspection fees, so be sure to find out ahead of time approximately what that’s going to cost you. Closing costs are typically 2 to 5 percent of the house cost.
3. Consider additional expenses
Don’t forget to set aside money for the odds and ends that come with a move. You might need to rent a truck, hire movers or buy furniture you weren’t expecting to need. Even boxes, tape and necessities can add up quickly, so budget in a little extra for the move.
4. Get your credit in top shape
You don’t want any surprises on your credit during the home-buying process, so take time beforehand to go through your report thoroughly. Pay off outstanding debts that might be dinging your credit, stay up-to-date on bills, and avoid opening new lines of credit. The better your credit, the likelier you are to score a lower interest rate.
Your credit will reflect the healthy (or detrimental) financial habits you put in place long before you’re looking to buy a home, so making improvements now will pay off down the line.
For more on the home-buying process, check out our posts on choosing the best mortgage for you, what to consider as a first-time homebuyer and what a home equity loan can do for you.