Home sales in the U.S. are skyrocketing as interest rates remain at historically low levels. In fact, Zillow expects nearly 7 million existing-home sales this year—the most since 2005. With so many prospective homebuyers on the market, you too may be wondering if it’s time to take the plunge into homeownership. Before you begin hunting for houses though, here are a few financial moves you should make to put yourself in the best purchasing position.
Here are 3 tips to get financially fit to buy a home.
Rebuild your credit.
Your credit will play a major role in whether or not you qualify for a mortgage loan as well as the terms and interest rate offered to you. And the better your credit score, the faster you will get approved, securing the best loan terms at the best interest rate. Taking steps to improve your credit before you even begin house hunting will put you in the best mortgage application position. You can achieve this by paying down debts, especially high-interest credit cards, refraining from opening new credit cards, or financing any big-ticket purchases like a car or furniture. It’s also advised that you check your credit report for potential errors that could be dinging your credit since you have the opportunity to dispute mistakes.
You can even use a credit builder loan available through apps like Self to rebuild your credit. Instead of getting money upfront, you make small monthly payments to your account over the course of 1 to 2 years while Self reports your on-time payments and balance to all three credit reporting agencies. At the end of the term, your payments unlock in the form of savings—less a few small fees—while rebuilding your credit.
Reassess your budget.
Potential homebuyers often look at the priciest homes they can afford to buy, underestimating all the additional costs that come with the monthly mortgage payment which include things like property taxes, homeowner’s insurance and other fees. Not to mention, buying a bigger home means you will have more expensive bills as well as maintenance or repairs to plan for. Factoring all these items into your monthly budget is crucial to set yourself up for homeownership success. Otherwise, you could lock yourself into a lifestyle that doesn’t afford much flexibility, which could lead to stress or debt.
Your monthly housing payment should average at around 25 percent of your take-home pay or, combined take-home pay if purchasing with a partner. Once you figure out how much you can comfortably spend a monthly housing payment, it’s time to set your home purchase price, making sure you don’t exceed your max budget. For help estimating a monthly mortgage and other real estate expenses, you can find mortgage calculators online at sites like MortgageCalculator.org.
Save, save, save.
Before you even begin perusing real estate listings, you need to start saving money for a home downpayment. The more money you put down, the better your chance of qualifying for a mortgage loan with the best interest rates available at that time. On the flip side, a smaller down payment makes you look like a riskier borrower since your loan-to-value ratio remains high. Though lenders may still approve you to borrow money with a smaller downpayment, chances are you will be charged a much higher interest rate which will result in a higher monthly payment and end up costing you much more over the life of the loan — like tens of thousands of dollars more! Not to mention, you may have to pay a separate private mortgage insurance fee for a downpayment of less than 20 percent of the home purchase price.
Therefore, buckle down on spending and consider how you can boost savings in your journey toward buying your first, or next home. From selling unwanted items to taking on side hustles to drastically cutting out discretionary purchases can all work together to increase your downpayment goal and put you in the best position to buy your dream home.
Andrea Woroch has partnered with Self to promote positive credit habits and help consumers take control of their financial future.