With the credit crisis and today’s softening real estate market it is more important than ever to have your finances in order to be able to make the purchase of a home. With money to lend, most lenders are anxious to make the loan but with the recent problems in the sub-prime market and the large number of foreclosures they are equally apprehensive to make the loan if your finances are not in order. I have 10 steps to get your finances in order and situate yourself in a better position to make the purchase of your next home or property.
1) Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.
2) Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt – car loans, student loans, revolving balances on credit cards – down to between 8 percent and 10 percent of your total income.
3) Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You’ll probably see some great ways to save.
4) Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.
5) Save for a down payment. Although it’s possible to get a mortgage with only 5 percent down – or even less in some cases – you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20 percent down payment.
6) Create a house fund. Don’t just plan on saving whatever’s left toward a down payment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills. Work your budget as though you already have a house payment and put back the approximate amount of your would-be house payment each month. You will be amazed at how quickly this will add up.
7) Keep your job. While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate.
8) Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off the entire balance promptly. You need a credit score of at least 620 to qualify for decent terms. A higher score will get you an even better rate.
9) Don’t make any large purchases just prior to house hunting. Many would be home purchasers make the huge mistake of going out and making another large purchase just prior to wanting to purchase a home. For example, many young people come to me and want to purchase a home but have recently purchased a new vehicle or large purchase and financed a portion of the purchase.
10) Work with an experienced REALTOR®. Many would-be-homebuyers find themselves working with an agent that has little or no experience assisting customers with their buying experience. Working with an experienced agent can make all the difference in your buying experience being a real down to earth dream-home purchase or your buying experience being a horror story.
The best time to begin working on your finances to get them in order to purchase a home or property is NOW! Begin now to implement the 10 steps above to get your finances in order. You’ll then be ready to make that purchase you have always wanted to make – your home! And remember when you get ready for step 10, call us.