If you’re considering buying a house soon, you may be wondering what the most responsible steps to take are before you sign any contracts or put down any money. There’s a lot to consider when purchasing a house: your debt-to income ratio, the amount you can afford to put toward a down payment, your credit score, your career path, and any other 5 to 10-year plans.
It’s only natural that all that can be pretty stressful. Take a deep breath – in this post, we’ll walk you through the 5 steps you need to take before you put a down payment on your first property. Read through carefully, and be sure you’re being careful and cautious in each step.
1. Start saving for your down payment
One of the easiest ways to ensure a lower interest rate on your mortgage is by putting a large down payment on your house. That means it’s important to start saving for one if you haven’t already. Really, in most cases, it just doesn’t make sense to look into purchasing a home if you haven’t saved anything for a considerable down payment.
The old conventional wisdom used to be that you should put a 20% down payment on any property you hope to buy. While that’s certainly a great choice if you have the means, the reality is that this isn’t an option for many would-be homebuyers. Nevertheless, it’s still wise to get as close to 20% as you can before buying – your future finances will certainly thank you.
Not sure where to start? A high yield savings account is a great way to build up savings in a place where it can still be easily accessed in case of emergencies.
2. Consider all your financing options
The next thing to think about is the source of financing you plan on securing. Financing for a home loan can be tricky to come by. There are basically three different providers of home mortgages that you can consider:
- Credit unions
- Independent loan companies
Banks and credit unions usually offer the best rates, but can sometimes have steeper credit and down payment requirements. Independent loan companies offer useful deals for those with rougher credit, like first time homebuyers in California who have a harder time getting close to a 20% down payment in such a competitive sellers’ market.
3. Budget, budget, budget
Next, as you consider funding options and save up for a down payment, it’s crucial that you begin budgeting. Budgeting should be a part of your savings routine, but when you’re gearing up for a down payment, closing costs, and the possibility of a higher monthly mortgage payment than your current rent, budgeting becomes even more important.
Need a handy go-to budget? Here’s one that many personal finance experts often suggest:
- 50% of your income should be spent on necessities, like food and rent
- 20% of your income should be put toward savings
- 30% can be spent on fun and leisure
If you’re serious about hitting your down-payment goals, it may be worth saving 30% instead of 20%, at least until you’re comfortable you can cover all the costs of home buying.
4. Work on your credit score
Next, you’ll want to take a good look at your credit score. A credit score is basically the way financial institutions measure how trustworthy of a buyer you are – which then partly determines your interest rate when you go to apply for a loan.
If you want to ensure that your mortgage rate is reasonable, and that you’re not spending an absurd amount of money on interest on top of the actual cost of the home, it’s worth it to take some time to build your credit score. You can do this by setting up payment plans for existing debts, and making sure that you pay your credit card bill on time each month.
5. Think through your buying options
Lastly, be sure that you’ve had a chance to seriously look at all your home buying options before you commit. It’s easy to feel like you have to jump at the first deal you see, but this could mean you’re passing up on better options you may encounter later.
Get a good lay of the land before you commit – and remember, always take good care of your finances before signing a mortgage or putting a down payment on property!