If you are ready to buy a house, you first need to learn how to budget for a house so you will be prepared for the long journey that’s ahead of you. Buying a house isn’t hard, if you’ve taken the time to educate yourself about the process. This will help you avoid any potential pitfalls and to go through the home buying process with ease. Taking the time to learn everything there is to know is the only way you can determine if you are ready to buy a home and if you truly have your financial house in order.
What do you need to know before buying a home?
Buying a home starts with educating yourself about the process. And education can mean the difference between making solid fact based decisions and making significant errors that will cost you money simply because you were unaware. Don’t let this be you.  You should start preparing to buy a home at least two years before actually starting the process. Here is where you should start.
How do you get your finances in order?
- What is your debt-to-income ratio? This is the percentage of your gross monthly income that is spent paying your current debts. If your debt-to-income ratio is more than 50 percent, you will need to spend some time paying off some of your debt before trying to buy a home. Additionally, most lenders will only allow you to spend 28% of your income on a mortgage payment. So again, if your debt-to income ratio is too high, you have some work to do before buying a home.
- Check your credit reports at all three credit bureaus here: Equifax, TransUnion and Experian. Your credit score weighs heavily on the mortgage approval process. You should start now by doing everything you can to raise your credit score before starting the home buying process. This can be done by paying your bills on time and paying off your debts, or paying them down until they are less than 30 percent of your credit limits. You should also check your credit reports for accuracy. And avoid opening any new lines of credit during this time as lenders don’t like to see multitudes of inquires on your credit report.
- Analyze your budget and find areas where you can cut back. This will help you pay your debts down more quickly and help you save a larger down payment. The more money you put down, the better your chances are of being approved and this will generally help you get a better interest rate as well.
What other expenses are in your mortgage payments?
Many people underestimate how much their mortgage payments will be because they don’t realize there are other amounts that are factored into their mortgage payments. A mortgage payment will generally include PMI, interest, property taxes and homeowners insurance.
Additionally, you also need to be aware that you might have to pay a homeowners association fee and that your utilities, property taxes, homeowners insurance, etc. will probably increase each year, which means your monthly mortgage payments will increase each year as well.
What other steps do you need to take to prepare?
Now that you have your financial house in order, or at least know what you have to do to get your financial house in order, it’s time to take the next steps in preparing to buy your new home. Here are a few things you can do to help determine if you are truly ready to buy a home.
You can start practicing making a house payment. Take the monthly amount of what you estimate your monthly mortgage payment to be and pay your rent out of that, then take the rest and put it into your down payment account. That means if your estimated mortgage amount is $1,000 and your rent is $800, you will take $200 each month and put it into your savings account. This will tell you if you are ready to buy a house and it will also serve as proof to a lender that you have the ability to make higher monthly mortgage payments.
Another great way to see if you are truly ready to buy a house is by demonstrating your ability to save. You will need to begin by establishing a monthly budget and include a set monthly savings amount within that budget. This will help you save for your down payment and any other expenses that may arise, as well as get you in the habit of saving and not spending. Then when you look at your savings account at the end of the year, you will be pleasantly surprised at how much you have actually saved. And, lenders like to see a consistent pattern of saving when considering you for a mortgage.
Once you have determined the amount you are willing to save each month, you can easily achieve that goal by setting up an automatic transfer of the money into your savings account, either with your bank, or you can have your employer send part of your paycheck to a savings account, which is helpful because, if you can’t touch it, you can’t spend it. Out of sight, out of mind.
The Bottom Line
Buying a house doesn’t have to be hard, but you do need to spend a significant amount of time and energy pre-preparing for the process, if you want a better chance of being approved and to give yourself every opportunity to receive the best possible interest rate. Remember, you will be paying on your home for up to 30 years and just the slightest increase in an interest rate could add up to thousands of dollars over the life of your loan. Therefore, it’s worth every minute you spend preparing to buy your new home and it all begins with learning how to budget.
