Buying a home is a huge step in life that should not be taken lightly. There are many steps to take before securing the deed to your new house. It all starts with smart financial planning.
If you’re looking to buy a home, keep reading to learn more about financial decision making tips to consider.
Evaluate Your Finances to See What You Can Afford
The general rule for financial planning for your home is called the 28 percent rule. The 28 percent rule suggests that this amount of your income should be reserved for your mortgage payments.
Some believe this number should be as high as 36 percent. Either way, you should be able to set aside roughly one-third of your income for housing.
Explore Different Areas
If you don’t feel tied to your current location or need to stay local due to work or family, now is the perfect time to start looking into moving out of state. Since the cost of livingand taxes vary state by state, you may not be able to afford a home in your area, but a perfectly lovely home might be waiting for you a few hours away.
You should consider your future as well. Do you plan on starting a family? The cost of raising a family is different everywhere, as well.
A real estate agent can give you tips for the best areas for you and your (planned) family.
Check Your Credit Score
Your credit score impacts the loans available to you when trying to qualify for a mortgage. Most creditors look at your FICO credit score. It’s a number that considers your credit or loan payment history, owed amounts, length of credit history, new credit, and credit mix.
This score determines your creditworthiness, or how likely a creditor is to trust you to pay off your mortgage.
The lower your credit score, the higher your interest payments will be. If your credit score is poor, take steps to improve it before requesting a home loan. Paying bills on time, paying down debt, and keeping your credit card balances low will help raise your score.
Save Up Money for a Down Payment and Other Expenses
Another critical step in the financial planning process is saving money. You can buy a house with a $0 down payment, although you may be required to take out private mortgage insurance (PMI). PMI covers the lender in case you ever default on your loan.
A $0 down payment will also mean you’ll have higher interest rates and more fees. It also means you have almost no equity. This option is suitable for people who can’t come up with a down payment but should be considered before deciding.
Take a Look at Morgage Terms and Rates
Familiarize yourself with mortgage terms and the average rates in today’s market. Typically rates for 15 or 30-year fixed terms are between 2.5% and 3%. The price of a homewill impact what you can expect to pay for a down payment and other fees.
Financial Tips to Consider Before Buying a Home
Now that you’ve started the search for your dream home, it’s time to get your finances in order; evaluate your income, and see what you can afford. Get a realtor on board to help with buying a home in the right area for you.
If you’re looking for a home in the Minneapolis or Saint Paul areas, get in touch with us.