When you are thinking about buying your first home, there is a lot you can do to prepare yourself beforehand to set you up for success. The most important thing you can do to get ready for homeownership is to prepare yourself financially.
If you are feeling overwhelmed or unsure about what things you could encounter as a homeowner, there are plenty of things you can do to prepare. Keep reading for 10 tips on how to get financially prepared for homeownership.
1. Understand your monthly expenses
Owning a home for the first time is a huge financial adjustment. Whereas previously you may have only been responsible for your rent and some utility bills, you are now responsible for more costs.
These are your:
- Mortgage
- Utilities
- Homeowners’ insurance
- Homeowners’ association costs
- Landscaping
- Maintenance
To ensure that you can afford your future home, it is essential to understand your monthly expenses before purchasing your home.
Look at your monthly income and total up your:
- Monthly expenses
- Bills
- Discretionary spending
Once you have a general idea of how much you spend each month, you will be able to calculate how much you can afford to spend on your home without overextending yourself.
2. Create a budget
If you have done the calculations to see how much money it takes to cover your monthly expenses, now comes the fun part: setting a budget. Even if you live frugally, it is helpful to live by a budget when you become a homeowner.
As a homeowner, unexpected expenses will inevitably pop up. Of course, you want to make sure you are not making yourself house-poor. Therefore, it is crucial to find ways to save money.
The important thing to remember when budgeting is to make it realistic.
Account for things that you know you will purchase each month and set aside some “fun money” for yourself too. If you feel tied to a budget that allows for little wiggle room, you are unlikely to stick with it long-term.
3. Start an emergency savings fund
Homeownership is expensive! There will always be an appliance to replace or a repair to be done, and you do not want to be caught without the cash to complete these pricey repairs. So, with your budget created, it is now time to start an emergency savings fund.
Add emergency savings as a line item in your budget to ensure that you contribute to it regularly. Then, even if you can only put away a few hundred dollars per month into that account, it will start to add up quickly.
Having money saved will take so much stress off you as a first-time homeowner. It will give you peace of mind to know that you have the money to cover your expenses if you need repairs or lose your income.
Life is unpredictable, so emergency savings funds are a must for new homeowners!
4. Prepare your down payment
Before you even start looking at houses, you want to have your down payment in the bank and ready to go. Depending on your financing options, you may also need extra money to set aside for things like closing costs, up-front payments on homeowners’ insurance, and more.
https://www.moneyunder30.com/buying-your-first-home
You have probably been saving towards this down payment for a while, so make sure you can access it quickly and that you have enough to cover your costs.
Your down payment will likely be anywhere from 3.5-20% of the purchase price of your home, depending on your credit score and available financing.
The amount of your down payment will also help you determine the mortgage you can afford. There are tons of mortgage calculators you can use online to help you see how much your down payment will impact the monthly mortgage cost of your future home.
5. Check your credit score
Your credit score will play a large part in your home buying process. Therefore, you want to make sure you know what it is and take some time to improve your score if needed.
You can usually get approved for a mortgage with any credit score over 500, but the higher your score, the more options that will be available to you. On the other hand, if you have a low credit score, you may only qualify for specific lending programs or must put more money down to purchase your home.
6. Assess your job stability
If you are about to sign on the dotted line for a 30-year mortgage, you want to do everything you can to make sure you have the money to pay that mortgage. An important factor to consider when buying a home is to make sure whether your job is stable and likely to stay that way.
Make sure you are happy with your job and do not anticipate any upcoming layoffs or pay cuts. While you cannot predict all these scenarios, and there is always a chance these things could happen, you can usually see some signs of instability beforehand.
If you have any concerns about your position at your current employer, consider pursuing a more stable job before you purchase your home. You may want to purchase a home that is less than you can afford on your current salary to allow for fluctuations in your income.
7. Find a realtor you can trust
A good realtor will make or break your home buying experience. You want someone knowledgeable in your local market who takes the time to understand your specific needs and wants for your future home.
Ask for realtor referrals from friends or family. Do not be afraid to meet with a few before selecting the one you work with. Realtors work on commission, and you want to give your business to someone who has your best interests at heart.
Your realtor should listen to you and make you feel like they are working for you. They should be easy to reach and supportive of essential things in your home. This is likely one of the most significant purchases you will ever make, so you want your realtor to feel like a partner.
8. Get pre-approved and understand your numbers
When you have decided to purchase your first home, the next step is to get pre-approved for a mortgage. Find a reputable mortgage lender and work with them to get a pre-approval. Based on your unique situation, they will collect some financial data from you and provide you with a home loan amount that they approve you for.
The great thing about getting pre-approved is that it will enable you to look at any home within your budget and quickly make an offer on it with proof that you can secure financing. In addition, this will potentially give you a leg up on other buyers, which is helpful if you are in a competitive market.
Mortgage pre-approvals are usually good for 30 days, so make sure only to apply when you are reasonably certain you will be purchasing a home within the next month. They can be renewed, but it will mean collecting additional data and most likely rerunning your credit.
9. Take a first-time homebuyers’ class
Many mortgage brokerages or real estate agencies offer free or low-cost classes to educate first-time homebuyers. While this may seem silly, there is a lot you can learn in these classes. It is also a great way to network with other first-time buyers and meet realtors and mortgage agents.
These classes will often cover different aspects of home-buying that can give you a leg up. Ask your realtor or mortgage agent if they know of any upcoming classes. They can most likely point you in the right direction.
If you feel educated and prepared to become a homeowner, you will feel so much less stressed and more equipped to deal with whatever is thrown your way. In addition, the tools you learn in classes like these will help you for years to come. You can navigate difficult home decisions with ease.
10. Decide how much house you can afford
Once you have saved, budgeted, planned, and started looking at homes, now is the time to decide what you want to spend. Of course, this decision is very personal and will look different for everyone, but it is not something to take lightly.
You want to make sure that once you purchase the home, you are comfortable with all the expenses that go along with it. So make sure you have enough money to cover all your bills plus some extra each month.
A great tip is to never buy a home for the highest amount you were pre-approved for. Mortgage loan calculators do not account for much wiggle room in the budget. The maximum amount they will approve you for is usually the amount you could afford to spend if you bought nothing else.
It is not realistic to not have other expenses ebb and flow throughout owning your home. It is generally suggested that you spend as little on your home as possible while still getting what you want and need. Spend the time doing the math, settle on a number that feels comfortable for you, and start searching!
Image credit: [Bartek Szewcyzk]