Buying a home is one of the biggest financial decisions you’re going to make in your life that’s why it’s important to know if you are financially ready to make the first step. Big decision like this needs planning ahead as much as one year or more before you buy a home.
You should also be able to answer the question “Can you afford it?” If you are living from paycheck to paycheck, the answer to this question would be discouraging. If you want to achieve your goal of homeownership, you need a better approach. You need a good budget plan to start with. Luckily, budgeting is not rocket science. Here’s what you need to do:
1. Add up every source of your income and list down all the expenses you make per month.
2. Now calculate homeownership cost. Include in your mortgage payment property taxes and home insurance and they should not exceed 25% of your monthly income. In our example, the total income is $4500. The maximum amount that must be spent on mortgage payment per month is $1125.
4500 x 0.25 = 1125
3. Adjust your budget and make room for expenses that might occur down the road.
In our example, the expenses now outweigh the income by $195. A few adjustments in the budget can balance the income and expenses. When income minus expenses is negative, you may have to think of how to change and improve your financial situation. Perhaps change your current life style or reduce your budget on things that are not necessities? When income minus expenses is zero or if you have more money left congratulations! It means you can afford to buy a home and it won’t bust your budget.
Now here are few more tips to help prepare your budget:
Establish a Budget
A simple budgeting can gradually shape your financial situation onto a better track. No, it won’t solve all your financial problems but it will give you a clearer picture of how you spend your money – wisely (or not at all).
To establish your budget, use a spreadsheet. Do not just use a budget template and fill it like a normal form. Your budget should reflect you and your lifestyle. Think of the categories that would truly match how you actually live. Once you’ve sorted your categories, add up how much you spend in a month in each of those categories. Subtract these costs from your net income.
You’ll be able to see how much money comes in and how much goes out. If the difference is negative, where can costs be cut to make the difference zero or less? Unless you find a way to bring in more money, you really should change your spending habits to get ahead.
Build Up Your Savings
Before you buy a home, you will need enough money for down payment, closing costs, home inspection, homeowners insurance, and moving expenses. It takes time to save enough money for the home you want so if you haven’t built up your savings yet, you need to start setting aside money on a regular basis now. There are many ways you can save money. Making small changes in your life can build up your savings and help you budget better. Here are some few tips:
- Don’t buy expensive items on impulse.
- Use debit and credit cards wisely. To minimize interest charges, limit credit card purchases to those you can pay off in full at the end of the month.
- Limit trips to expensive coffee shops or restaurants.
- Limit your spending on things you just want, instead buy only what you really need.
- Pay your credit card on time and in full if you can to save on late fees and interest charges.
- Set savings goal.
- Make saving money easier with automatic transfers.
While you increase your savings, you should also reduce your debt. List all your debts and create a plan for reducing them. Split them into priority debts and non-priority debts. Your priority debts don’t have to be the largest debt or the debt with the highest interest rates, your priority debts are those that carry the most serious consequence if you don’t pay them. Non-priority debts are less serious.
Pay more than the minimum required and if you could afford to pay more, do it to save money on interest costs. You could also check if your bank or credit union can help you consolidate all of your consumer debts into one loan with one payment at a lower interest rate. This can be a helpful first step in getting your debt paid off.
Check Your Credit
Your eligibility to borrow and the rate to pay are closely dependent on your credit score. A good credit score can be the difference between being able to buy a home. Have your credit check several months before you apply for a mortgage, that way you can report if there are factual errors and you will have enough time to clean it up. It will also give you enough time to fix your credit if your rating is low.
After you know how much you can comfortably spend on a mortgage payment, established a budget, saved enough for down payment and costs to buy a property, and your credit is favorable, then you are ready to make the first step of buying a home and achieve your goal of homeownership!