By Kaylie Reese.
Buying a house is among the biggest financial decisions you will make during your lifetime. That’s why it’s crucial to start planning early. Whether you build, buy a move-in ready home or a century-old fixer-upper, there are many costs to consider long before you put in your offer.
My husband and I are in the process of preparing to enter the housing market. It likely will be a couple of years before we hold the keys to our first home, but one reason for that is because we are taking the time to ensure that the decisions we make now will prepare us well for our financial future.
Here are a few financial tips we have been using to guide us as we move forward on this journey.
Take a serious look at your financial situation
The first thing you will want to do is to figure out your finances.
Remember, when you apply for a home loan, lenders look at where your finances stand now and not where you think you will be in the future. Further, your financial situation includes income, your credit score and identifying outstanding debts you may have, such as student loans, vehicle or credit card payments, as well as your plan for repayment.
When applying for a mortgage or home loan, it’s important to know that your debt-to-income ratio will come into play. This ratio is a calculation of monthly earnings to the estimated payment toward debts. The lower the number, the better, in lenders’ eyes.
Another important number to monitor is your credit score. Certain lenders require a minimum credit score in order to be eligible for a mortgage loan, so it’s good to have an idea about where you’re starting. A credit score, loosely, is an estimation about how likely borrowers are to repay their debts on schedule. The closer your score is to 800, the more likely lenders presume you will repay your debts and on an established schedule.
This year, through April 2021, you are eligible to get a free credit report each week from all three national credit reporting agencies, according to consumer.ftc.gov. These credit agencies (Equifax, Experian and TransUnion), otherwise permit you to check your credit report for free once every 12-month period. Other ways to monitor your credit score without a hard inquiry, which can affect the score, include apps such as CreditKarma and Mint Money Manager.
Talk with a mortgage lender
Many banks have in-house financial and mortgage counselors who provide services that include looking into your specific financial status, which can help you plan ahead for a future purchase or prepare to sign on the dotted line to official homeownership. Talking with an expert is particularly important for first-time homebuyers, who may be eligible for certain tax exemptions or other flexible lending options.
If you’re wondering where to start, consider The Maine State Housing Authority ( mainehousing.org).
Be realistic about which corners to cut
Before we go any further, I must confess that I am a huge fan of home improvement shows and have some experience in working with a few basic power tools, patching materials and paint. The consequence of this could be that I may be more willing to bite off more than I can chew when it comes to spotting a fixer-upper with a low upfront cost. On other days, I will admit that a move-in-ready home sounds fabulous — even if it comes with a much higher price tag.
When it comes to looking for a home, you need to be realistic about what you are capable of doing and are willing to do when it comes to home repairs and maintenance. Further, safety is crucial, and many home updates require permits and inspectors for large projects to ensure you and future homeowners are out of harm’s way.
Build your down payment
It goes without saying, but the more you can pay upfront for your home, the better.
When saving for a big-ticket item such as a home down payment, it’s important to take a look at your budget. First, identify what your monthly expenses are compared to your income. Separate your expenses into categories: recurring bills or debt repayment, which are necessities, versus your weekly lunch habit. A great way to track your spending is through secure phone apps that are linked to your bank account, such as Mint, EveryDollar and Honeydue. If you aren’t left with much money after the expenditures, consider cutting back in areas that you can.
When working on your budget, identify how much you can comfortably set aside each month toward that down payment. Categorize that amount like you would for recurring bills. Finally, stick to that commitment.
One way to ensure that amount is set aside each week or month is through automatic deposits to a separate savings account or a club account. Most employment billing offices are willing to help you set up where your paycheck goes. This is a great way to set it and forget it, when it comes to saving toward a house, reducing that extra step of transferring money yourself.
Another option to consider is focusing on how to increase your income. Maybe it’s time to ask for that raise, start a side-hustle with low overhead costs or pick up another part-time job on the weekends for a while.
Also, consider investing some or all of a one-time income boost, such as a holiday bonus or tax return, toward your down payment.
The traditional rule of thumb has been to save roughly 20 percent for your down payment — an amount that has held many prospective homebuyers back from taking that next step, according to NerdWallet’s 2020 Home Buyer Report, the results of which were analyzed from an online survey conducted by The Harris Poll.
However, there may be other options for first-time homebuyers, according to the Maine State Housing Authority. Several options that offer low to no down payments for first-time homebuyers include the Federal Housing Administration (FHA) loan, which helps lower income individuals and families to buy a home; loans backed by the U.S. Department of Veterans Affairs (VA), for American veterans and spouses; and Rural Development (RA) loans, which are backed by the U.S. Department of Agriculture for homes in rural communities.
In addition to setting up your down payment, it’s crucial to set aside a portion of your savings for closing costs and other “hidden expenses,” including but not limited to setting up utilities, home maintenance and repairs, and homeowners insurance.
Eyes on your own journey
It can be really easy to fall into the trap of comparing others’ home-buying experiences with your own. My last bit of advice? Don’t do it.
We all have different opportunities and misfortunes that pave the way to this next step, and the housing market is always changing. While your path to homeownership may be easy for you, it may be challenging for others, and vice versa.