Buying a home is exciting, but it’s also a time to sit down and think seriously about your finances. Navigating the waters of your financial health, the requirements of the home-buying process can be overwhelming, which is why many people try to skip this step. Fortunately, you don’t have to figure it out all alone. Here’s a brief financial checklist you can use to decide whether you’re ready to buy a home:
1. Check Your Credit Score
While you don’t need a credit score of 800 to qualify for a traditional mortgage, it’s usually recommended that you have a 650 or above. If that’s way above your current score, you might need to pump the brakes. Fortunately, there are quite a few things you can do to improve your credit score, like focusing on paying off your credit cards one at a time.
That said, there are loan options for those whose credit is less than ideal. You might want to consider alternative loan options like hard money lenders. With hard money loans, your credit score isn’t a factor in the approval process.
2. Get Your Debt in Order
Debt-to-income ratio is the ratio between all of your debt (including the prospective mortgage) to your current income. Usually, mortgage providers typically want borrowers to have a DTIR under 43%.
If you have a large amount of credit card debt spread out across multiple cards, still have a high student loan balance, or have your kids’ car loans under your name, it’s time to focus on reducing your debt in order to lower your DTIR.
3. Figure Out Your Price Range
It’s easy to fantasize about finding the perfect home with all the bedrooms and bathrooms you could need, but daydreaming and reality are two very different things. Depending on where you want to buy, the cost of your dream home might be out of reach.
Before you get carried away with demands, make sure you seriously consider how much you can realistically afford based on your income. Using a tool like an affordability calculator should make it easy.
You might also consider looking into getting a home through a housing association, which provide homes for those who are low income.
4. Research Your Mortgage Options
You never want to settle for the first mortgage you find. Instead, shop around by getting quotes from several lenders. You’d be surprised by the difference a lower interest rate can make in the long term.
If none of your mortgage loan options are ideal, keep in mind that you can refinance your mortgage down the line for a better rate as long as you stay on the right track financially.
5. Estimate Your Down Payment (And Make Sure You Can Afford It)
While there are some loans that require only a small down payment, like a FHA loan which allows you to put down as little as 3.5%, that is the exception to the rule. Typically, people aim for a 10% to 20% down payment.
Since you’ve already figured out your price range based on your current income, you should be able to estimate the necessary down payment.
6. Make a Monthly Budget
From HOA fees to bills your landlord might have previously covered, it’s likely that you budget is going to shift when you buy a home. Before making the move to homeownership, it’s critical that you figure your new budget (or at least a close estimate) to ensure you can afford it on your current income and with your other financial obligations.
Not sure where to start? Here’s a simple how-to for creating a budget.
7. Bolster Your Savings
Understandably, managing your personal finances is one of the biggest challenges many of us face. However, sometimes you have to make some tough calls in order to start saving more. Cut out the expenses that aren’t necessary, like multiple streaming services or that gym membership you never use anyways. You could also try to reduce your electric bill by making your home more energy efficient.
In addition to cutting unnecessary expenses to bolster your savings, you can also start a side gig. There are countless opportunities to freelance online, even if your family has a demanding schedule. Get started by signing up for a leading independent contracting site.
8. Organize Your Financial Documentation
Last but not least, you’ll need to get your financial documentation in order. This means knowing your credit score, bank statements, w2’s, taxes, and more. Not only will these help you create a realistic budget, but you’ll need to present your financial documentation to any potential lenders to begin the application process. Make sure you’re organized before getting started, it will really make the entire process that much easier.
If you feel confident that you’ve satisfied these financial requirements, you’re probably safe to go ahead and start looking for your dream home.