If you’re thinking about buying a home, the current real estate market presents some unique opportunities. The economy has been on a roller coaster ride for the past few years, and home prices have gone down. More homes have gone on the market, too, and for buyers, that means more choices (and better deals).
Those same tumultuous years also can also teach buyers a lesson: Make smart buying decisions and be wise with your finances.
Impulsive buying is never a good idea when it comes to a purchase as significant as a home, but it was something of a trend at the height of the mid-2000s. Now, with banks lending far more cautiously, you need to be absolutely certain that your finances are in order – and healthy – to be able to get the best deal on your purchase.
Steps You Can Take Today to Prepare to Buy a Home
There are a number of steps you can take when buying a home, and you might need to work on them simultaneously. You’ll need to:
- Start saving money
- Check your credit score
- Improve your credit score
- Figure out how much house you can afford
Save for a Down Payment: 5 Tips to Get You Started
While you don’t need to come up with a 20 percent down payment to buy a home, the more money you put down, the lower your monthly payments will be. In many cases, you can buy a home with 3.5 or 10 percent down (and if you’re using a VA loan, you don’t have to put anything down) – but that doesn’t mean you should.
Saving money is hard – there’s no getting around it. Try to kick off your new money-saving habits by:
- Stashing away your entire tax return
- Setting up automatic deductions from your paycheck that go directly into a savings account
- Buying a certificate of deposit at money-saving milestones (like $1,000) so you can’t touch the cash
- Reducing your high-interest debt as much as possible, and putting money that used to go toward those payments into savings
- Creating a budget that cuts out things that aren’t necessary, like dining out or entertainment, and redirecting the money you would’ve spent on those things to savings
How to Check Your Credit Score Before Buying a Home
Your credit is an important factor in determining the terms under which you can get a mortgage. Broadly speaking, the better your credit is, the more positively you’ll be viewed by lenders – and that can lead to better interest rates. And because you’ll be paying off your home for years to come, it’s important to get the best rate possible.
Thanks to the Federal Trade Commission, we’re all entitled to one free copy of our credit report each year. You can request yours here.
Look for mistakes right away. Sometimes companies report the wrong credit information for the wrong people, and sometimes they don’t update as often as they could. If you see anything that looks like fraud or identity theft, like accounts you know you don’t have, get on the phone with the agency reporting it right away – they can help you figure out what’s going on.
Aside from issues, you can keep boosting your credit score by:
- Paying all your bills on time
- Reducing your overall debt
- Limiting new credit inquiries
Most lenders use your FICO® score (FICO stands for Fair Isaac Corporation) to determine whether they’ll be willing to let you borrow the money to buy a home. FICO scores range between 300 and 850, with 300 being the worst possible score and 850 being the best possible score. Scores above 670 are considered good.
Five factors determine your FICO score:
- Payment history (35%). Late payments, and those that you never made, really put a dent in your credit score. Creditors report payments that are 30, 60, 90 and 120 or more days late. Late payments usually drop off your report 7 years after the delinquency date, so if you made a late payment in June of 2016, it should disappear around June of 2023.
- Accounts owed, or how much of your available credit you’re using (30%). Your credit score is based on whether you’re maxing out your credit cards and you have other types of debt (like car payments and mortgages), maintaining a low balances on your credit accounts, or just keeping cards open but not using them.
- Length of credit history (15%). Your score in this area improves over time. Someone who’s new to credit hasn’t had time that he or she can make payments on long-term accounts – but there’s a caveat to that. Your score is based on an average of how old all your accounts are. If you close your oldest open account, your credit history will look younger. Many experts suggest not closing old accounts, even if you don’t use them, unless you have a great reason (like they carry steep annual fees).
- New credit (10%). When you apply for new credit, your credit score takes a temporary dip. Lenders do a “hard inquiry,” which stays on your credit report for 2 years. The more hard inquiries you have, the lower your credit score will be; lenders don’t want to see that you’re asking for money all over town, because that can indicate that extending you credit can be risky.
- Credit mix (10%). The types of credit accounts you have matter. Your score improves when you have multiple types, like auto loans, credit cards, personal loans and mortgage loans. Lenders see this as a way to determine you’re responsible and balanced when it comes to finances.
Are Your Finances in Good Enough Shape to Buy a Home?
Making a smart decision about buying a home comes down to this: You need to make an honest assessment of what you can afford. Remember, you might be approved for a loan that’s bigger than what you need. While it may be tempting to buy a pricier house, the stress of struggling to make payments could diminish your enjoyment of your new home and even put you at financial risk. One rule of thumb is that most borrowers can afford a home loan that runs about two and a half times their annual salary.
Buying a home is a complex process, but one that is ultimately very rewarding when done right. By organizing your finances well in advance, you’ll help set yourself up for success.
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About 30A Local Properties:
30A Local Properties is located in Grayton Beach, FL and services the South Walton community. The team of locals confidently offers the experience of over six hundred South Walton real estate transactions, nearly three decades of banking experience in commercial and residential property holding positions, and over a decade of entrepreneurial real estate experience in property investments and management. Visit our website at www.30alocalproperties.com or stop by our office and meet the team:
30A Local Properties
35 Clayton Lane, Suite B
Grayton Beach, FL 32459
P: (850) 213 3048
F: (850) 213 0035