Purchasing a home is like getting ready for a road trip. Before the trip, it is wise to inspect things like gas, tires, and engine oil. In the same way, there are certain financial requirements to meet before buying a home.

Checkpoints
Real estate agent showing detail of lease agreement to interracial couple. Estate broker explaining lease agreement or purchase contract to couple in a new house.

Review Your Credit Score and History

To a certain extent, a credit score is a person’s financial ‘passport.’ Your credit score shows you are financially capable of borrowing money and what level of interest will be charged on the loan. Although a score of 620 is sufficient for a lot of lenders, better arrangements are usually offered to those that score 740 or more.

You are entitled to a credit report from each of the three major credit reporting agencies annually. You must watch for errors, such as late or incorrect payments. These errors can negatively affect your score. You should correct these errors before submitting a mortgage application.

Save for Your Down Payment

Most loans range from a 3%-5% down payment. If you can put down 20%, you avoid paying private mortgage insurance. This is a monthly fee that protects the lender if you stop paying for whatever reason. If the total cost is $250,000, for example, a 20% down payment comes to $50,000.

Consider opening a high-yield savings account to save just for your down payment. Gaining that extra 1% or 2% in interest can really help your money grow in a way that exceeds a normal savings account.

Build Your Emergency Fund

Life surprises you with unexpected expenses. The furnace might die in winter, or a pipe might burst on a Sunday afternoon. If you save 3-6 months’ worth of living expenses, you’ll be financially secure if/when these occur.

This money is separate from your down payment savings. This is your financial shield. You will sleep better knowing it’s available, even if you don’t need it.

Mortgage Pre-Approval

Mortgage pre-approval indicates how serious you are to sellers. It also helps you gauge how much you can spend. First-time homebuyers should always get comparison quotes from multiple lenders. Even local banks and credit unions, like US Eagle FCU, can have remarkably different terms and rates.

The pre-approval process can be quite tedious. You will need to provide pay stubs, tax returns, bank statements, and proof of employment . Organizing the documents well ahead of time will serve you well.

Determine Your Total Monthly Spending on Housing

You will pay more than just the mortgage in a month. Your costs will include taxes, insurance, and additional fees. If your down payment was less than 20%, you should also anticipate private mortgage insurance. Housing should be less than 28% of your gross monthly salary. If you make $5,000 in a month before tax, look to spend less than $1,400 on housing. This helps you remain in a comfortable position.

Analyze Your Debt-to-Income Ratio

Your earnings will be assessed alongside your monthly debt obligations. This includes credit card bills, car loans, potential mortgages, student loans, and other expenses. Even though some programs allow for higher ratios, the most common threshold is 43%. High-interest debt significantly affects your debt repayment, so forgiving that $300 car payment improves your ability to borrow for a mortgage.

Conclusion

Setting these goals can be very rewarding. Nevertheless, it demands patience and self-control. You shouldn’t take property ownership lightly, given the significant and often substantial costs involved. If you want to enjoy the property without the strain of money matters, take control of your spending habits. In the future, you will be happy to reflect on how easy it was because of the planning that was put in place.