Article written by guest author, Brittany Fisher, who has spent more than 20 years as a CPA and is currently working on a book about financial literacy (due out in 2018). She also runs Financiallywell.info.
Buy, don’t rent. It’s the mantra of financial advisors and real estate gurus across the country — and for good reason. Having your own property allows you to lock into a sound investment that rises in value slowly but surely with each passing year, helping you build wealth along the way. It can be an intimidating process, however, particularly securing a mortgage and making a down payment. Here are some financial tips to make it easier.
Create a Realistic Budget
Without a budget, it’s easy to get in over your head and end up with more house than you bargained for. Have a look at what you spend on rent now and how much you save at the end of the month — that’ll give you a rough estimate of the maximum that you can pay in mortgage, as well as utilities, taxes, and insurance. Stick to your guns and do not go over this limit, no matter what the lender or the real estate agent tells you.
Know Your FICO Score
That’s the three-digit number that indicates how likely you are to repay debt and determines whether you qualify for certain mortgages. They’re generated by the three main credit bureaus — Equifax, Experian, and TransUnion — with a score of 700 or above considered good and 800, excellent. If you’re above the latter, you should have little trouble securing financing.
Fix Your Credit Rating
If you’re below 700, there’s work to be done. The easiest way to improve your score is to knuckle down and pay off existing debt. For that, you’ll need to crunch some numbers and reduce your monthly spending, which means cutting down on shopping and restaurants. Also, make sure you pay bills on time, as this can have a negative effect on your rating. Set up payment reminders to keep you up to date.
Cut Consumer Debt
Even if you’re making payments on time, you should cut down on your total debt anyway, and that includes student loans. That’s because of the 28/36 ratio that lenders use when deciding whether to issue a mortgage to a prospective home buyer. Your payments to the lender should take up no more than 28 percent of your monthly income with total debt payments of no more than 36 percent. If you lower your total debt load, you’ll more easily qualify for a mortgage.
Get Pre-Approved
The experts at the finance website Bankrate say that house hunting before a pre-approval is like going into a grocery store without your wallet. But what does it mean? Basically, the bank has reviewed your documents and agreed to lend you a certain amount of money based on your income, credit score, and other factors. Many realtors won’t even accept offers from buyers that haven’t been pre-approved.
Research the Market
Not only should you be aware of overall house prices where you want to live but also the average down payment for recent purchases. This will give you an estimate of how much you’ll have to pony up immediately upon signing and what will be covered by the mortgage. Also, ask about the percentage of homes that sell below the listed price (which is 3.3 percent in the New York, New York area), as this indicates whether you’re in a buyer’s market or not.
Go Below Your Means
As mentioned earlier, there will be a lot of pressure from banks and real estate agents to do the opposite, as the more money is involved in the deal, the more everyone gets at the end — except you. Besides, your expenses go beyond the down payment and mortgage as you’ll need to fork over for closing costs as well as renovations. And if you’re stretched to the limit with your home, you’ll be less able to handle any other financial emergencies that arise.
Make a Big Down Payment
Back in the day, it was standard procedure to make a 20 percent down payment whenever buying a house, and that’s a healthy practice despite the prevalence of new mortgages that allow for as little as 0 percent up front. Why? It allows some protection against price declines, according to the financial planners at Wealth Pilgrim, while eliminating the need for mortgage insurance and keeping monthly payments low.
Follow these rules and you’ll be able to enjoy an excellent standard of living while paying off your mortgage rather than scrounging for loose change for groceries. You can relax while watching your wealth accrue.