How to Financially Prepare to Buy a House
Buying a house is a big decision. It’s a big lifestyle decision and a big financial decision. Just like anything that impacts your life in a major way, it’s best to step back and do some planning first. Here are some tips on how to get ready financially.
Determine how much house you can afford.
Many first-time homebuyers are surprised by how expensive their new house is. There are expenses like property taxes, insurance and water bills that seem to magically appear. So, when you are deciding which house to buy, be very careful.
- Don’t spend your preapproved max.
- Determine based on your free cash flow what you can afford.
- Spend 30% or less of your gross monthly income on your total housing payment.
Start saving your cash.
Every penny counts when you buy a house. The mortgage doesn’t cover everything, and you do want to have some cash left over after you move in. It’s no fun sitting in a new house without the freedom to pick up the new furniture or home décor items you might need.
- Be prepared for at least a 20% down payment to avoid PMI.
- Closing costs are anywhere from 2-5% of the purchase price.
- Remember moving expenses and any extra money for home improvement projects.
Make sure your credit is in good shape.
Check to see how your credit is doing.
- Don’t apply for new loans until after your closing date.
- Pay down credit card balances.
Get your documentation in order.
The mortgage company is going to need paperwork to get you approved. Ask them what they will want even before you apply. Get the documents together so you are not scrambling at the last minute to try to find something they need.
- Paystubs, W2s, bank statements, tax returns are typically on the list.
Shop for a mortgage.
Mortgages are not all the same. Different financial institutions will read your application with different eyes. You will find varying rates and terms. Compare them carefully.
- Get a preapproval. It makes you a more attractive buyer.
- Carefully compare rates and terms.
Take these steps to prepare before you step out and start looking at real estate. Then, move ahead into homeownership confidently!