Purchasing a home is one of the more common components of the American dream. While it costs money to own a house, paying off a mortgage can serve as a forced savings account of sorts. Every time you pay off some of the principle of your home loan, your net worth should increase. Additionally, houses tend to appreciate over time. This is not true for every market, but it is generally the way owning a house can build wealth over time. However, not everyone will qualify for a loan. This leaves two options: paying cash or improving your finances so that you can qualify for a loan. The latter option will be more likely because many, if not most, people who have enough money to pay cash for a home will opt to do so, making a loan unnecessary.
Pay Off Debt
Those with a high debt-to-income ratio will have more trouble accessing a home loan with attractive terms. If this ratio is too high, it may be impossible to get a mortgage, which will put your ability to purchase a home on hold for a bit. Lenders want a debt-to-income ratio that’s lower than 43 percent. This is the level at which a lender will offer a qualified mortgage. It’s also the level at which you’ll be viewed as a good investment for a bank or mortgage company. This means that your interest rate will likely be lower.
Paying down debt while having a stable or increasing income level will lower your debt-to-income ratio. The best types of debt to pay off quickly are credit cards and other high-interest debts. Credit cards can come with interest rates in the 15% to 20% range, which makes them some of the most expensive debt to carry. Paying credit cards on an accelerated schedule has the double benefit of paying down your principle while also decreasing the amount of your monthly income that goes toward paying interest.
Save A Down Payment
It is possible in many markets to get a home without a large down payment. Some lenders will even require no down payment. While it’s possible to get a home with little or no money down, there are a couple of major risks that come with this strategy. First, there is no equity built up in a home. If a recession hits in the first handful of years you own the home, you might have the value of the house drop. This will lead to a situation in which you’re underwater on the home. In other words, you will owe more than the house is worth. Many homeowners found themselves in this situation during the aftermath of the Great Recession, and it took years for them to claw their way out of their situation.
Another negative that’s associated with a low down payment is the necessity of paying private mortgage insurance. Banks require this insurance to protect them against defaults when homeowners have little equity. Borrowers have to have at least 20% equity in a home before they are exempt from paying PMI. If you can avoid having to pay it, you could save hundreds on your mortgage payment each month. This is the second reason you’ll want to save up a down payment.
Save For An Emergency
Purchasing a home comes with a wide range of new risks. You might have a hot water heater go out. You might need to replace your HVAC. Sewer pipes can collapse and lead to costly repairs. It’s unlikely that all of these events will happen at once, but if you own your home for a couple of decades, it’s likely that at least one will. Each of these problems can cost several hundred dollars; the more expensive ones will cost thousands. If your budget is tight when you’re looking to buy a home, it will get even tighter if you run into an unexpected expense.
According to a recent survey, fewer than 40% of Americans could handle a $1,000 emergency without selling something or borrowing the money. This is a scary statistic, but it makes it clear that saving for an emergency is an important step to take. It makes sense regardless of whether you’re looking to buy a new home.
Sell Stuff
Many people buy more home than they need. They feel the need to fit all of the stuff they’ve accumulated over a period of years. One great way to avoid this conundrum is selling your excess stuff. Many people are willing to pay money for household items you might not have a use for. Why not meet the demands of the market? If you’ve been on your own for a while, it’s likely that you could make thousands from selling items in a garage sale or through an online marketplace. This money could go toward any of the recommendations listed above. Also, having fewer household goods could mean that a smaller home will work for you, which could help your finances even more.
Buying a home is a big step toward the American dream. However, this dream can become a nightmare if you don’t have your finances in order before you make the purchase. You could end up underwater, or you might have to pay more in interest costs. Getting your financial house in order before buying a home could make your net worth grow much larger over the long run. Of course, you’ll want to have your documents in order before applying for a loan, and you’ll also want to get pre-approved so that you know what you can afford before contacting a realtor.
from Feedster https://www.feedster.com/real-estate/4-ways-to-get-your-finances-back-on-track-before-buying-a-house/?utm_source=rss&utm_medium=rss&utm_campaign=4-ways-to-get-your-finances-back-on-track-before-buying-a-house
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