12 Great Habits to Start That Will Help You Buy a Home
Homeownership is a great way to invest in your future while building toward your dream home. It allows you to take control of your living situation and stop throwing rent money away without getting anything in return. Unfortunately, homeownership for many can seem like an impossible goal. Prices of homes are skyrocketing and many people looking to buy their first home are facing problems with student loan debt or unfair/stagnant salaries. However, just because you’re not financially ready to purchase a home this year doesn’t mean you’ll never get there. To make sure that you’re setting yourself up for future success, here are 12 great habits to start that will help you buy a home.
1. Pay Your Bills on Time
While this may seem like common sense, it’s something that’s worth stressing. Paying your bills on time is a habit that will help you garnish a strong credit score and create habits that help you put necessities before any wants. Over time, this gets you in the habit of paying things on time, which is essential to avoid penalties on mortgage payments.
If you have trouble remembering to pay your bills on time, consider setting up automatic payments. Just make sure that there are adequate funds in your account to avoid overdraft fees and penalties. If you’re currently renting, your monthly rent payments count as bills and have a big impact on both your credit score and lending reliability.
2. Know Your Credit Score
While paying your bills on time can help improve your credit score, it’s important that you know what it is and how spending habits affect it. If you don’t currently know what your credit score is, now is the perfect time to check. There are hundreds of ways you can acquire your credit score, including free websites and mobile bank apps. These reports will show you where you’re doing well and what habits are negatively affecting your score so you can work on making changes accordingly. Get in the habit of checking your credit score regularly and engaging in activities that will help improve it.
3. Maintain a Strong Debt-to-Income Ratio
Most people have some degree of debt, especially if paying off student loans or a car payment. However, you’ll want to try to keep your debt-to-income ratio as low as possible. There are two different numbers that a lender will examine: the front-end debt-to-income ratio and the back-end debt-to-income ratio. These include how much you pay in debt each month when compared to your pre-tax income. Front-end debt-to-income is also called household ratio and includes all your monthly housing charges like mortgage or rent and property tax. A good goal is to keep this below 28%. Back-end debt-to-income ratio is all your other charges and debts. This ratio is often more scrutinized by lenders. Try to keep it below 36%.
4. Make Daily Compromises
Every financial decision that you make throughout any given day can either hurt or help you. While spending $4 on a coffee doesn’t seem like much at the point of transaction, doing this every day for a year will cost you $1,460. This could equate to an entire month’s mortgage payment. Making small, daily compromises will help you save money you didn’t even realize you could. Try to make the most out of every dollar and if that means making a few compromises, that’s okay. The more you practice this habit, the more you’ll set yourself up for success.
5. Stay Organized with Paperwork
When it comes time to actually purchase a home, you’ll need to gather a conglomerate of paperwork for your broker and agents. To avoid having to scramble, start making it a habit to be organized with your paperwork. Create a filing system for your important documents such as tax returns, bank records, any employee statements, and more. This will make applying for a mortgage much easier when the time comes.
6. Work with an Insurance Broker
Getting an early start on understanding your preliminary requirements is a good way to create goals and work towards homeownership. Begin working with an insurance or mortgage broker now. Doing so can help you better understand exactly what you’ll need to do to qualify for insurance, mortgages, and low interest rates. This, in turn, allows you to better understand what you need to save for a down payment and your overall budget for a house.
7. Test Homeownership Budgeting
Many people focus on mortgage payments when they think about saving for homeownership, but there are actually a few other hidden costs that you should be aware of. In addition, you’ll want to make sure that you’re prepared to make monthly mortgage payments and any maintenance costs that may arise. Since you’re responsible for your home, you’ll be financially responsible for any repairs. To test out homeownership budget, try to set aside what your anticipated mortgage will be in addition to a safety net for repairs. A good rule of thumb is to save about 10% of your mortgage each month for maintenance and repairs. So, if your mortgage is going to be about $1,400, you’ll need to set aside $140 for emergencies.
8. Contribute to a Savings Account
If you’re able to afford putting aside the homeownership budget, consider contributing the difference between the total and your rent into a savings account. For example, if your rent is $800 and your “homeowner budget” discussed above is $1,540, then put $740 each month into savings. This will help you better understand whether or not you’ll be able to afford the mortgage payment on your current salary. If so, great. Keep contributing to build up your savings for a down payment. If you can’t afford it, consider budgeting your other expenses or lowering your overall housing budget.
9. Invest Your Money
To get the most out of your savings, consider investing your money in an interest-bearing account. This allows you to get more out of a traditional savings account without the risk of stock market investments or pre-penalty withdrawals of IRA accounts. If you’re comfortable with taking the risk, investing in the stock market could be a profitable way to grow your down payment savings.
10. Conduct Thorough Research
If you’ve lived in one area your whole life, you may want to spread your wings and check out surrounding locations. By beginning early, you’ll be able to conduct research on neighborhoods, cities, and even states without the stress of immediate buying. If you plan to raise a family there, include school ratings, crime rate, and even walkability or recreation in your research. This will help you feel like you’re making an educated decision and when the time comes, you’ll be confident in your choice.
11. Be Proactive
You can start preparing for the application process in advanced. Once you know that you’re ready to buy, be proactive and get pre-approved for your mortgage. This involves going to your bank to determine the amount and terms that you’ll qualify for based on your current level of income and debt. This act alone is what’s going to help you better understand what you’ll be able to afford and will impact the rest of your decisions moving forward. There is a difference between pre-qualification and pre-approval, so make sure you understand the two. While pre-qualification can help you get a good understanding of whether or not you’ll be approved in the future, pre-approval is what home sellers will use to determine who to sell their property to.
12. Visit Open Houses Regularly
While attending open houses a few years before you plan to purchase your first home seems excessive, it will allow you to better understand what you can afford and what features of a home you absolutely love. Attending open houses early is also a great incentive to be diligent with your savings. If you have any questions or want to get the most out of these experiences, consider speaking with an experienced real estate agent early. A consultation never hurts and could help you gain a better understanding of the real estate world.
The real estate agents at First Star Realty are committed to providing outstanding realtor services to Northwest Arkansas and surrounding areas. Whether you’re looking to buy a home today or five years from now, our team of seasoned realtors will help you find an affordable home. Regardless of your requirements, budget restraints, or homebuying experience, we stay dedicated to our clients and always provide personalized services. Call us today at 479-267-1600 or fill out a contact form on our website.