Purchasing a new home can be an exciting but stressful endeavor. Preparing your finances ahead of time can help make the process easier and can help ensure you are able to afford the home you want to buy. Here are some steps to consider at least a year before you're ready to start looking for a new home.
Diversify Your Credit
Having a good credit score isn't the only key factor lenders look at. If you only have student loans or a few credit cards on your credit report, you may not be deemed worthy in the eyes of a mortgage lender. Consider taking out a personal loan or adding an account that gives your credit a bit of diversity. This should be done more than a year ahead of time so you can show that the bills are paid on time consistently. Conversely, taking out a loan of any kind or opening new credit card accounts right before applying for a mortgage can have a negative impact on your approval odds.
Gather Your Down Payment
You may already be saving up for a new home, but coming up with a large lump sum can be difficult for some potential buyers. Look at your current investments to determine which can be leveraged when you are ready to purchase a home. You may be able to take out a loan or withdraw money from your 401K for a first-time home purchase. Some IRA investments may also let you take money out to pay for the purchase of a new home. Speak to a financial advisor before making any withdrawals, as you'll want to balance affording a down payment with having money left for retirement.
Set A Practice Budget
Being a homeowner can come with a lot of hidden costs. You'll want to be completely sure you can cover the cost of your new home every month without going further into debt. Determine the estimated cost of your mortgage, property taxes, and homeowners insurance to help create a practice budget. Add in an allowance for utilities, including trash and sewage. You may also want to add a small amount to account for necessary repairs for the home. Once you have determined what the grand total for these expenses is, begin working the amount into your monthly budget. This will help you determine the affordability of a new home, and you can also put the extra money in your savings account to help cover the cost of your future down payment.
Work closely with an experienced real estate agent and financial advisor to help ensure you are making the right choices at each step in the process of buying a home. Being fully prepared financially can help prevent headaches down the road.