Thinking of buying a home? In most cases this is a much better scenario than continuing to rent. While renting does have some advantages, the equity and investment value of owning your own home far outpace those few perks. However, it is not just as simple as deciding one day that you want to purchase a home and doing it the next.
In fact, before you decide to buy a home there is some actual homework you should do. Here are seven things you should do before buying a home.
Improve Your Credit Score
The higher your credit score, the easier it is to qualify for a loan and the lower your interest rate on a mortgage will be. If your score is low enough, you might not be offered a mortgage at all. However, even if you have a poor score now, don’t be discouraged. Instead, work to improve it. Just know these steps may take some time to be effective.
- Pay on time: Pay the debts you have on time and try not to be late on any payments.
- You may have to borrow more to improve your score: If you have been avoiding credit cards or loans, you might have a low score. Increasing your score may mean taking out a loan and paying it back in a timely manner.
- Monitor Your Score: Keep an eye on your score, and if it drops unexpectedly, find out why. You may be the victim of fraud or identity theft.
- Watch Credit Utilization: Don’t max out the cards you do have. Leave some room on them, especially if you are using them to build credit.
Improving your credit score is something you can do, and it is something you can control if you work effectively to do so.
Lower Your Debt
The other thing you can do that will also work to improve your credit score is to lower your debt. While you might need to borrow and pay off new debt to increase your score, at the same time you will want to pay off old debts, especially collection and delinquent accounts.
There are even debt consolidation loans and firms that will help you work to lower the amount of money you owe. The less you owe, the more likely you will be to qualify for the loan you need to get the home you are looking for. The higher your debt to income ratio, the lower the amount you will be pre-approved for will be, and the larger down payment you will need.
As much as possible, reduce the overall amount of the debt you are in, and your home buying process will go much better.
Even if you encounter the rare kind of deal where you will need little or no money down to buy a home there will be closing costs, moving costs, and other factors to consider. It will cost you money to buy your home and to move in no matter what the scenario.
Also, most of the time you will need a down payment of some sort, and the lender will want to see that money has been in your account for a while. They don’t want you to borrow the down payment from another source so that you can get a mortgage.
You should have a solid down payment, moving money, and an emergency stash in your savings before you buy a home.
Minimize Monthly Bills
Your mortgage plus taxes and insurance will probably be higher than what you are paying for rent. This means you will want to reduce your monthly expenses as much as possible before buying a home. Consider these options:
- Consolidate Debts: Pool debts together in a single loan or credit card. Your payment and the interest you pay in the long run will be less.
- Stream Instead of Cable: Stream movies and TV instead of paying for cable.
- Work Out at Home: Cancel that gym membership and walk, run, or workout at home instead.
- Eat in More: Cook at home instead of going out. It will not only be cheaper, but better for you.
- Cancel other Memberships: There may be other memberships you can do without until you buy your home. Put them on hold until then.
The lower your monthly bills, the better able you will be to afford your new home.
Decide What You Want
You could look at every home on the market, but if you are in a larger area or a busy market, that could be exhausting. Narrow down your choices using a few simple guidelines and don’t look at homes outside of them.
- Price: Stay in the Range you Can Afford
- Size: From number of bathrooms to a garage and square footage, decide what you want and stick with it.
- Location: The neighborhood you want to live in or how far you are from work makes a difference. Make choices and stick with them.
This doesn’t mean you can’t look at a really good deal outside your area, or something just slightly over your price range that seems perfect. However, if you stay as close as possible to what you want, your search will be way less exhausting and more likely to end in success.
Once you are ready to buy, consider getting pre-approved by a lender. That way you know if what you want is something you can really afford. This will also help you keep in your price range when you are looking. If you know your maximum approval, you won’t go over it unless you have the savings to cover the difference.
This is the best way to see the right houses at the right time, and keep you and your realtor from wasting time.
Balance Your Budget
Finally, let your budget dictate what you can afford, not your pre-approval numbers. Balance your budget and know going in what you can afford every month. Don’t go over those numbers for any reason. Too high of payments will set you up for eventual failure even if your situation improves.
Be sure to factor all of the costs, including taxes, that go into your mortgage. Your budget should rule this financial decision.
Buying a home is an exciting time and an excellent choice. Just be sure that you are ready by doing these seven things before you buy a home.