First Time Home Buyer? Make Sure Your Finances Are in Order

There may not be a better time to buy a home.  Interest rates are low as are home prices.  If you are a first time buyer looking to purchase your first home, you are lucky to do so in such a good environment.  However, even though the time might be right economically, make sure you are prepared financially first.  The lowest interest rate doesn’t help you if you ultimately can’t afford a home.

To see if you are ready, consider these standards for home ownership:

1.  Do you have an ample emergency fund?  Experts disagree if you should have as little as a 3 month emergency fund or as much as a 12 month one, but somewhere in the middle is good.  Ultimately, you should have enough money in the bank that you could survive for many months should you become unemployed or injured or lose an income source.  Losing income is stressful enough; it is even worse if you are scrambling to make a house payment.

2.  Is your credit score high enough?  To get good interest rates your credit score should be at least 720, if not higher.  If your credit score is lower, take a few months to step away from the house hunt and instead focus on improving your credit.  Doing so will help you score a better interest rate and save you thousands of dollars over the life of your home loan.

3.  How much debt do you have?  Ideally, your total debt load, including your mortgage payment, shouldn’t be more than 33 to 36% of your gross monthly income.  If yours is higher, the bank likely won’t approve your loan, but if you are approved, you could have a hard time meeting your obligations.  Again, taking a break from the house search to pay down some debt is a good idea. A mortgage calculator is a great too to understand what you can or can’t afford.

4.  Do you have money for property taxes and repairs?  Don’t forget that you will also have to pay property taxes (which can be costly in some areas) as well as set aside money for house repairs when they come up.  Two to four percent of the home’s value is what you should be setting aside each year to handle repairs.  Is there room in your budget for these expenses?

While now is a great time to buy, make sure you are not acting prematurely.  Put your finances in order first, and home ownership will be a joy.  Buy a house before you are financially ready, and it could simply be a burden.

6 comments to First Time Home Buyer? Make Sure Your Finances Are in Order

  • Kim

    #2) being aware of your Fico score isn’t enough. You must know what makes you gain points or lose points. For instance, did you know it is virtually impossible to get a score of 800+ below the age of 30?
    How to gain points:
    1) Credit History: keep the credit cards that you had since you were in High school or University.
    2) Debt to credit ratio: make sure your credit card debt is equivalent to less than 1/2 of your total limit.
    3) Payment frequency: make sure you pay your balance every month or at least MORE than minimum.
    4) Credit variety: make sure you have revolving and non-revolving credit: loans, credit cards, line of credit etc. the only exception are department store credit cards. Never sign up for one.
    5) on Time: pay a week before the due date, never wait till the last minute, those online transactions take business days and you can become a day late.

    How to LOSE points:
    1) you cancelled one of your credit cards, especially your old one! Every time you close an account, you can lose close to 10+ points each time.
    2) debt to credit ratio. It is better to have 3 credit cards with a total credit limit of $10,000 and a total credit debt of $3,500 than ONE credit card with a limit of $5,000 and the same $3,500 debt. It’s a double whammy: No variety and High debt ratio.
    3) you lose points if you you only pay the mimium payment every month.
    4)Credit variety: Guaranteed NOT to gain any points if you don’t have a variety of credit. Non-revolving credit shows your level of reliability and revolving-credit shows restraint. Both contribute to history, which in turn give you points every year as your years of history increase.
    5) opening a credit account cost points, just as closing one does.
    6) having a credit check costs points. When you are shopping for a house, you will no doubt be shopping for a mortgage (brokers are recommended). Every time you visit a bank for a rate, your credit score gets dinged.
    7) Refuse limit increases that require a credit check. Some limit increases are automatic, like $500 per year without a credit check. Go for those. The higher your limit goes every year, the lowers your debt ratio becomes over time. This AND the combined history is how you can achieve a 800+ Fico score.

    Advice:
    Get your credit report for free from Equifax or Transunion. The free reports don’t give you your number but it gives you how many times a credit inquiry was made. That was when I discovered my ex had asked his banker friend to do a credit check on me 3 years after we broke up. Great opening for a liability case! I suggest paying $20 every year to get your Fico number BUT never sign up for this monthly $10 credit alert offered by credit cards. Waste of money. With my $20/yr report I knew how to get over my 800 mark. What is so good about getting above 800? You get prefferential treatment and rates. For instant, the bank may not require the same strict rules on your qualifications on getting a mortgage and you save on top of their best rates. I was just offered 2.99% 7-year fixed and portable too! Or 2.69% 5 year fixed rate, also portable. Having a great Fico score gives you great choices & the best rates. You should try it.

  • It’s a great time to buy, and sometimes I get tempted, but I need to clear out my debt and build up a solid savings cushion first. Thanks for the reminder!

  • I think #4 is super important. I think that is where many people make mistakes. You have the money to pay for the house, but they forget about how much it costs to repair items.

  • Sarah Park

    We are planning to buy a home maybe next year. We are still preparing for
    enough resources. Or, maybe a little more than enough.

  • Gerald

    Great advice on how to be financially fiscal. We seem to find that the biggest obstacle to homeownership is the down payment. Many people just do not save money, or find it very difficult to do so. If not for the many down payment assistance programs that are available, home sales would be lagging even more than they currently are.

  • […] Sustainable Personal Finance said if you’re a first time home buyer then get your finances in order. […]

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