Budget

Prepare Yourself Financially Before (and After) Buying a Home

Step 1: Budget Basics Worksheet 

The first step in getting yourself in financial shape to buy a home is to know exactly how much money comes in and how much goes out. Develop a household budget.  Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries. Use a worksheet to list your income and expenses.   

 

Step 2: Reduce Your Debt & Eliminate Bad Debt 

If you’re planning on buying a home Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.

One of the secrets to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans.

Good Debt:

  • Mortgage Loan
  • School Loan
  • Real Estate Loan
  • Business Loan

BAD DEBT:

  •   Credit Cards
  • Store Credit Cards
  • Auto Loan

“When you buy something that goes down in value immediately, that’s bad debt,” says David Bach, CEO of Finish Rich Inc., and author of “The Finish Rich Workbook.” “If it has no potential to increase in value, that’s bad debt.”

 

Step 3: Build Cash (Emergency) Reserves

While having reserves is not always a requirement by Mortgage Lenders nor is being debt (bad) free, I believe in the same time tested goals as do most financial advisors that once a person (or couple) is debt-free they should build a permanent savings cushion of 3 to 6 months’ worth of living expensive.

 

Additional Steps to Prepare Yourself Financially Before

(and after) Buying  a Home 

Look for ways to save:

You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often. Another great tip is to pay for everything with cash. It may not be easy and some things you’ll have no choice but to pay for them with a credit/debit cards such as online purchases. Once you start paying for all other purchases with cash, you’ll be amazed at what you will discover. Give it a try for at least 30 days…after that you can always go back plastic.

 

Increase your income:

Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.

 

Save for a down payment:

Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.

 

Keep your job:

While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.

 

Establish a good credit history:

Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly.  For a complete report on credit see Credit section of site.