3 Steps to Improve Your Finances Before Buying a Home
It is never too early to begin thinking about the home-buying process, but some buyers put off planning because it often feels overwhelming. However, taking a step-by-step approach streamlines the process and makes it less stressful. If you want to buy a home in the next six to 12 months, the following are three broad steps to help you do so.
Understand Initial Costs
When you first consider buying a home, it is important to understand the initial costs. One of the most important financial requirements of buying a home is a sufficient down payment, usually at least 3.5 percent of the home’s total price, although some lenders require more.
By checking the local market and seeing what the average cost of homes are in the Minneapolis area as well as how many days on average houses are on the market before selling, you can have a game plan about what costs are. Consider your needs and budget to come up with a target price range and begin saving for a down payment.
Also check the listings of local realtor Sarah Marrinan or call her at 651-964-0289 to help you make a plan on how you can purchase a home. Now is also a good time to make a home-buying checklist to help you stay organized and on track.
Get Your Finances in Order
After you’ve researched the financial criteria for buying a home, you can begin working toward meeting those goals. The first step toward improving your economic situation is developing an awareness of your expenditures relative to your income. A personal finance app can help you track your monthly expenses, or you can keep up with the information in an old-fashioned budget planner notebook.
Once you have taken stock of your financial situation, it is time to begin increasing your credit score. If you have credit cards that are either maxed out or close to being so, pay those down as quickly as you can while still making on-time payments for your other cards and loans. If necessary, use a debt consolidation program to streamline your payments.
If you are a business owner, you need to take additional steps to protect yourself and your assets. While on paper you may not appear to have enough money to buy a house, often the opposite is true. According to Brightpath, “One way to legally inflate self-employed income is to avoid claiming expenses related to your business on your tax return. You might end up with a higher tax bill, but you’ll look like a better bet to a lender.” In addition, you should form an LLC to separate your business from personal assets, which will be even more important in home ownership. You also need to prepare even further in advance since your small business can impact their debt-to-income ratio.
In addition to working on your credit, you also need to start saving money for a down payment. Revisit the information in your budget app or planner and look for areas where you can cut back. Setting up automatic payments to your savings account makes saving easier for many people. Working a small side job and directing all income from that work straight into your savings is a good way to boost your savings if you have trouble finding areas where you can cut back.
Understand Ongoing Costs
In addition to qualifying for a home loan, it is important to understand the ongoing costs of homeownership, including utilities, property taxes, and maintenance costs. Some neighborhoods charge a mandatory homeowners’ association fee. Although it is possible to lower costs associated with certain aspects of homeownership, many are fixed. Make sure you understand the taxes, fees, and other costs before you purchase the home.
Some buyers choose to purchase a home in an area with lower property taxes after finding out the tax rate. Others, on the other hand, decide to go for a smaller home to cut back on heating and cooling costs. If you want to make the home more energy efficient by installing new appliances or making other improvements, research the upfront costs associated with the modifications and budget accordingly.
Buying a home is exciting, but the financial aspect is often stressful. Taking it slow and staying organized will help you stay calm so that you can fully enjoy the fun parts of buying a new home.
When you’re ready to buy a home, Sarah Marrinan from Engel & Völkers Minneapolis can help you find the right fit for you. Call 651-964-0289 to learn more!