How do you know if you're ready to buy a home? Maybe you're sick of renting. Maybe you have saved money over the last year to prepare to pay a sizable down payment on a home. Maybe you're at a point in your life where you should own a home because, after all, your friends do. Maybe you want a place where you can sing at the top of your lungs or simply a place where you can celebrate with friends and family without a neighbor pounding on the wall (apartments, ugh!). Whatever the reason, you'll want to make sure you have a few things in order before you start the home buying journey.
In your quest to buy a home, you have probably scoured the internet looking for homes in your area and saved a few favorites. You might think you can afford to purchase a $350,000 home but can you really? Let's look at what's most important when preparing to purchase your first home.
Save Your Money
I listen to motivational speakers and entrepreneurs regularly. One thing I've learned about their success is the importance of saving money vs. wasting it on "luxuries". I'm not talking about trips to Europe and expensive sports cars. I'm talking about eating out, new clothes that you don't need, buying the next round of drinks, going to the movies, buying lattes, etc. You might not think that removing these things from you life, or at least cutting back, would help you save to buy a house but they will. For example, a friend of mine recently calculated how much he was spending on espresso drinks -- nearly $250/month! Might as well just throw $5 on the sidewalk a couple of times a day. Now he buys a bag of coffee and some creamer and saves the money he was wasting at the coffeehouse. Cut a couple of unnecessary spending habits and soon you'll find you have saved enough for a down payment.
My friend saved over $200/month by buying coffee beans and creamer vs. buying espresso drinks every day.
Your Credit Score (FICO Score)
How good are you at paying your bills? Your FICO score will tell all. If your credit score is under 600, it's a reflection of not paying bills on time, getting behind on car payments, maxing out credit cards, and simply carrying excessive amounts of debt.
In most cases, your credit score needs to be above 620 for a mortgage. With a high credit score, you'll have a better chance of getting a good interest rate and a lower monthly mortgage payment. If your credit score is low, start paying bills on time and consider doubling up if you're behind. If you are so far in debt that you don't know where to start, consider consulting a financial adviser or following someone like Dave Ramsey to get back on track.
Spending Habits & Budget
When you know how much you're spending each month vs. how much you're earning, you'll get a clearer picture of what it's going to take to save to purchase a house. Look at how much you're spending on groceries, eating out, entertainment, online monthly subscriptions, rent, transportation, your cell phone, etc. Start by finding ways to cut back on these expenses so you can increase your savings. Could you buy in bulk, freeze a lot of your groceries and save on your monthly bill and the number of trips you make to the grocery store? Could you find a less expensive phone plan? Could you move into a more affordable apartment or rent a room instead? The answer to all of these questions is YES, if you're willing to make some sacrifices.
It may be helpful to get a part-time job in order to achieve your goal. Being a tutor, delivering groceries, becoming an Uber or Lyft driver, etc. Earning an extra $500/month ($6000/year!) adds up quickly whether you're paying down debt or building up your down payment account.
Talk to a Lender and Get Pre-Approved
When looking for a lender, seek out 3 or more to determine who is going to give you the best interest rate and lowest fees. Then, see which one provides the most help in understanding how to pay off debt and save. Also, you want to find someone you connect with. If you're uncomfortable with their communication style and/or lack of experience, move on to another lender.
Once you find a lender you're comfortable with, get pre-approved for a mortgage loan. Getting pre-approved will give you the benefit of knowing exactly what you can afford based off of your financial situation (not an guesstimate). Because you've been pre-approved, your real estate agent will be able to start showing you homes immediately, saving you time and frustration.
Choose a Real Estate Agent
Choosing an agent is a lot like choosing a lender. You want someone who is not only licensed but experienced, a good communicator, knows the neighborhood where you want to buy a home, and is just an overall great fit. Talk to at least 3 agents before settling on one.
Buying a home is probably the largest investment you'll make in your life. Use the tips in this article to save for a down payment and make the goal of homeownership a reality. If you've got a lot of debt, consult with a financial counselor or start using a debt reduction program. If you've already started saving for a down payment, talk to a lender and real estate agent about your next steps. At this time next year you could be in a home of your own!