8 Steps to Getting Your Finances in Order

People who want to buy a home typically set that goal months before contacting a Realtor for assistance.  During that time, the potential home buyer focuses on preparation items, spending the majority of time on getting finances in order.  Following are eight simple steps that will assure that a buyer is ready to proceed in identifying home options.

1. Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.   If you haven’t experienced the unexpected, use a “reserve” factor.  Followers of the Dave Ramsey financial plans work to have at least a $1000 emergency fund to handle these types of items.
2. Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt—car loans, student loans, revolving balances on credit cards—down to between 8 percent and 10 percent of your total income.   Buyers sometimes thinks that closing all accounts will be in their best interest.  That’s not always the case.  Talking to a lender will help outline the most appropriate path to both debt reduction and maintenance of accounts.  For the best results, list accounts from smallest to largest and work on paying off the smallest accounts first.
3. Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. Documenting all expenses is like taking stock of your daily calorie intake.  There are always items you overlook.  Be disciplined.  You’ll probably see some great ways to save.
4. Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want. If your income is already sufficient for the price range of your choice, consider the part-time job as a way to enlarge your down payment.
5. Save for a down payment. Although it’s possible to get a mortgage with as little as 3.5% of the purchase price down—or even less for VA or USDA loans—you can usually get a better rate and a lower overall cost if you put down more. The ideal is a 20 percent down payment, so that you can avoid paying a mortgage insurance premium.
6. Create a house fund. Don’t just plan on saving “whatever’s left” of your monthly budget toward a down payment. Instead, decide on a certain amount per month you want to save, then put it away as you pay your monthly bills.   Even if you already have your down payment well in hand, or a family member intends to provide you a gift, the house fund will enable you to handle expenses such as moving, getting set up in the new home with basics like blinds or curtains, with the least amount of anxiety.
7. Keep your job. While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate. When considering buying a home, it is never a good idea to change jobs (unless, of course, the home purchase is related to a job relocation).
8. Establish a good credit history. For first time home buyers, there’s always a possibility that a credit history is non-existent.  Again, before getting a random credit card, talk this over with a lender.  With or without credit cards, it will be essential to make payments on any existing accounts by the due date. A “late” payment can prohibit being approved for a mortgage.

If you have other questions about preparing for a home purchase, don’t hesitate to give me a call!