3 Financial Areas to Focus On When Preparing to Buy a Home
Buying a home or second home is a big undertaking. If your finances are not in the best shape, figuring out how to do so can feel overwhelming. The following are three areas of your financial life that you should focus on as you prepare to purchase.
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Data show that Americans, on average, have about $90,000 in debt. Although debt does not immediately disqualify potential homebuyers, it is important to make sure the total outstanding amount is at a manageable level before applying for a mortgage.
There are different strategies to reduce debt. Some individuals pay off the accounts with the highest interest rates first, and others choose to pay off the smallest amounts first to minimize the total number of outstanding accounts. In some situations, debt consolidation may be helpful. Carefully consider your situation before taking out this type of loan, and make sure you fully understand the terms.
To avoid getting further into debt and help you make larger payments on your open accounts, create a budget. Determine how much you need for recurring expenses, emergency expenses, savings, and debt payments. Enjoy free entertainment options when possible, pack your lunch for work and look for other ways to save money to help you stick with your budget.
- Credit Score
Your credit rating is a deciding factor when applying for a mortgage, so check yours. Create accounts with the three big credit bureaus, Equifax, Experian, and TransUnion. You should be able to get one free copy of your credit report per year from each organization. For many mortgages, you’ll need a score of at least 620, but some programs have more lenient requirements. You can also check into down payment assistance like grants, loans, and tax credits to save on home-buying costs.
If your rating is on the low end, do what you can to improve your score. When you see your reports from the credit bureaus, check for errors and have them corrected. Pay down your existing debt, and avoid opening new accounts if possible. If you have any accounts that have been turned over to a collections agency, pay those off as possible. Pay all your bills on time and in full. Set up one or more credit-building apps to help you monitor and actively improve your score.
Using a financial calculator can help you determine the amount you need to save for a down payment. You can utilize the same saving strategies you used for debt repayment to set aside a down payment.
Picking up a side job and putting the earnings from that job into a separate account can help you grow your savings quickly. If your side hustle involves starting your own business, or if you are already self-employed, consider the financial benefits of an LLC. One of the biggest advantages is that the formation of an LLC protects your personal assets. This means that your personal assets cannot be seized to pay the business’s debts or legal fines. However, the extent of this protection varies by state, so check your local guidelines.
When you decide that you are ready to buy a home, you must first assess your financial situation. Focus on reducing your debt, raising your credit score, and increasing your savings to ensure you are in the best possible position to make an offer when you find the right home.