To rent or buy a home isn’t just a financial decision, it’s also about comfort and your vision for your life. When that vision clears and home ownership is in view, will you be ready? As one of the most important financial transactions of your life, you need to make sure your finances are in order before beginning the home-buying process.
Let’s start at the beginning. Get control of your spending and save, save, save. Monitor & improve your credit score. Analyze how much house you need & can afford.
Control Your Spending and Save, Save, Save
The best way to control your spending is to set a budget and stick to it. Work first to pay off existing debt, such as car payments, credit cards and student loans. Then begin building an emergency fund and save for a down payment.
An emergency fund, equivalent to 3 - 6 months of expenses, is especially important as a home owner. Why? When you no longer have a landlord, the responsibility of paying for repairs falls on you. With a full emergency fund and no consumer debt taking chunks out of your monthly budget, an unexpected repair should be an aggravation not a financial problem.
Depending on the lender and type of mortgage, you may be able to purchase a home with a low down payment (5 – 10%). Experts recommend, however, making a down payment of 20% of the purchase price. Not only will this lower your mortgage payments, but it will also save you from PMI.
Private mortgage insurance (PMI) will run $70–$90 per month per $100,000 borrowed. And PMI does nothing for you except pay your mortgage company in the event they have to foreclose on you and they lose money.
Monitor & Improve Your Credit Score
Now is a perfect time to pull your credit reports from TransUnion, Experian, and Equifax and clean up any inaccuracies. See Credit Scores Do Matter for tips on improving your score. A higher score can help you secure the best terms and interest rates available (PMI rates too!).
Analyze How Much House You Need & Can Afford
Start by thinking about your life stage. It doesn’t make sense to buy a house if you may move next year. The process of buying and selling is expensive and time consuming, so make sure you feel confident you’ll be in that area for the next five years or so. Also, to the extent possible, make sure you are looking for a home that will meet your family’s needs for at least the next several years.
Now that you have an idea of what you need, what can you afford? The general rule is that your monthly mortgage payment (plus taxes and insurance) should be less than 25% of your total take-home pay. It’s important to know how much home you can afford so you don’t wind up in financial trouble. The truth is, it doesn’t matter if the kitchen is fabulous or the backyard is huge. If you can’t pay the mortgage each month, your home will be a burden—not a blessing!
The beauty of Fairfield County Real Estate is its diversity. Within each town there are homes of different styles and price ranges — historic in-town colonials, contemporary new construction, antique farmhouses and waterfront estates. When you are ready, we’re here to help you find home.