Buying a family home is one of the most expensive purchases you will ever make. Since you will need a considerable amount to make the purchase, it’s essential to keep your finances in order even before you start your home search. That will ensure that the process goes smoothly. It will also save you from financial problems.
Read on to learn some expert tips on preparing your finances when you want to purchase a family home.
1. Decide Between Renting And Buying
When you want to buy a home, you may still be disputing the idea since you have the option of renting. Each of the options has its upside and downside.
For example, when you decide to rent, you will have more flexibility on where you can live. If you change your job or feel like you need to move cities, you just need to look for another house to rent. However, you will be helping your landlord to build wealth and equity instead of building yours. You also don’t have control over the place.
Whether you’re buying a home in Austin, TX, or moving to Colorado, you will build wealth while enjoying other perks, such as tax benefits. However, you must be ready to spend a significant amount of money to acquire it. You will also be responsible for all the maintenance and repairs. Evaluate between renting and buying a home, and go for the option that suits you best.
2. Check Your Credit
If you intend to purchase your home using a mortgage, you know that your credit status is one of the things lenders consider when deciding whether to give you a mortgage or not. You can get your credit report from the major credit reporting bureaus.
Some of the information in a credit report includes your credit account status and your repayment history. Lenders will use this information to decide whether to give you a loan or not. The information also determines the interest rate you get. Generally, a person with a poor credit report will be charged a higher interest than one with favorable credit.
If your credit report is not very impressive, try looking for ways to repair it. By doing so, you will not only increase your chances of qualifying for a mortgage but also qualify for a low-rate loan. In addition, these loans can save you a significant amount of money in interest.
You also need to check your credit score. The credit score is calculated using the details in the credit report. So the first thing you should do is check for accuracy in your score. If the score is poor, you can work on improving it, as doing so will give you an upper hand when applying for a mortgage.
If there are errors in your report, have them rectified. Your score will improve if you manage to dispute them successfully and have them removed. Some of the most common errors on credit reports include misreported payments, duplicated accounts, and fraudulent accounts.
Additionally, if there are pending payments you are supposed to make, prioritize paying them. Although it might not reflect on your report immediately, it might help you in the future.
3. Check Your DTI (Debt-To-Income) Ratio
Your debt-to-income ratio refers to the difference between your overall income and your total debt. Banks are going to consider your ratio when you apply for a mortgage. They do this to measure your ability to manage mortgage payments each month.
A low DTI shows a good balance between your income and debt. Conversely, a very high ratio demonstrates that you have too much debt for your current income.
If you have a very high ratio, you might have problems qualifying for a loan. Lenders may take that as a signal that you won’t be able to handle an additional financial obligation comfortably.
Luckily, you can improve your ratio. You have two options to do this. The first one is to pay down your debt, and the second is to increase your earnings.
4. Consider How Much You Can Afford
You need to consider how much you can afford to pay for a house. This will save you from being house poor. If you don’t know what house poor is, it means someone who spends a very large percentage of their income on homeownership. As a result, a house-poor person is left with very little income to cater to their other needs.
Before you even start house searching, you need to develop a budget on how much you are willing and able to spend. A home affordability calculator can be a good start for doing this.
Additionally, you need to deeply understand your cash flow, which entails what you get as income, what you spend, and what you save.
A good rule of thumb is that you should never pay more than 28% of your income on housing costs.
And as you think of what you can afford in terms of purchasing costs, you also need to consider the closing costs, as they also take a considerable amount of money. Some of the things you will need to pay for as closing costs include:
- Home inspection
- Application fees
- Appraisal fees
- Escrow fees
- Underwriting fee
- Homeowners’ insurance
- Transfer taxes
5. Save Money For The Down Payment
You will have to prove that you are in a position to pay a down payment to qualify for a mortgage. If you can put down a larger down payment, lenders will see you as a low-risk mortgagee, increasing your chances of qualifying for a loan. Additionally, your monthly payments will be lesser when you pay a significant amount as a down payment.
And if you don’t have enough savings to pay for your down payment, you can consider getting down payment assistance through various programs. These programs make it easy to own a home through a mortgage. However, you have to meet some requirements to qualify for them.
Purchasing a home for your family can be exciting yet challenging. To make the process easy and the experience seamless, start by preparing your finances and keeping them in order. Other processes will flow smoothly, and your overall home acquisition journey will be easy.