2019 is officially here to stay, but do you have the plan to conqueror it? It is important to set common goals such as travels, experiences, career, savings, health, and family. One goal that may benefit many of these categories is your desired living situation. Here we are going to go over how to take the proper steps to obtain your desired living situation through planning for your home purchase. These tips may apply to current home owners looking to buy a new home, or renters looking to purchase a home of their own.
Mastering your Budget
The very first step toward financial freedom and preparing for a home purchase is mastering your budget. It is important to master your budget to avoid over stretching what you can truly afford. There is a term called “house poor” and this means that all of your money goes toward paying for your home and there is little money left over for anything else. This often leads to extra stress, financial anxiety, and the inability to pursue other goals such as saving, traveling, or experiences.
When planning a budget, it is important to factor in all personal goals first, such as how much you will need to save for traveling, experiences or hobbies, and saving or retirement. This way you can live a balanced life and avoid being “house poor”. Analyze how much you will need each month in each category, and then focus on housing or living expenses as one of the last items.
- Living (Rent or Mortgage, Internet, Utilities)
- Food (Groceries, Eating Out)
- Entertainment (Movies, Hobbies, Dates)
- Travel (Public Transit, Car Payment, Gas, Maintenance, Insurance)
- Health (Insurance, Gym)
- Subscriptions (TV, Music, Books, Other)
- Debt (Personal, Student, Credit Card, Other)
- Miscellaneous Expenses (Medical, Holidays, etc.)
- Savings (Retirement, Home Purchase, Emergency Fund)
Above are the main categories that you should consider when budgeting. It may take a few months to truly get an accurate budget down as you begin to pay a closer look at your spending habits. There are many free tools and mobile applications available to help track spending and budgeting - the most popular is Mint. If you can master your budget, you can master anything!
Paying Down Debt
When planning to purchase a home, it is important to pay down as much debt as possible. This should help naturally improve your credit score, which is an important factor for obtaining a mortgage loan to buy a home. It will also help make sure your debt to income ratio is within a range that will help you qualify for a home mortgage.
A debt to income ratio is exactly what it sounds like, it is how much current monthly debt payments you are required to pay versus your current monthly income. This figure tells a lender how much of your income is going only toward minimum debt payments.
Budget how much extra you plan on paying down toward your debt per month to pay it off faster. It is always smart to pay off your higher interest rate debt first. There is also another technique for paying off debt called the “Debt Snowball”. This method says to pay off the smallest debt first and then take that monthly payment and add it to the next smallest in line, and then add that to the next. This way, your monthly payment toward your debt will get bigger and bigger over time until it is all paid off.
By paying off as much debt as possible, you will be able to enter home ownership with less stress and possibly even more homes to choose from. Less debt means qualifying for a more expensive home is easier, if your personal budget allows.
Saving for a Down Payment
When saving for a down payment, it is very important to start as soon as possible so you are ready to go when the time comes to take the plunge. Open a separate savings account that you do not touch and begin putting a little money per month into this account.
You may be thinking; “How much do I need to save to buy a house?” Don’t worry, you only need a little bit saved in order to obtain a home loan for your home purchase. There are many programs that will allow for only 3% – 3.5% down payment. Some home loan programs may even allow you to obtain “down payment assistance”, which can help make your down payment even lower. If you have served in the armed forces or currently serve, you may be eligible for 100% financing for your home purchase, although loan fees may still be required from you.
Many people do not realize that you can purchase a home with a small down payment, but this is very common. If your savings allow, we always recommend as much down payment as possible, and 20% down payment is something to strive for (but not needed). If you have any questions about low down payment home loan programs, feel free to give us a call so we can help you plan.
Improving Credit Score
Having a great credit score is something that everyone should strive for. Your personal credit score is used in many important life events: financing education, financing a car, obtaining credit cards, personal loans, business financing, renting, getting a mortgage, and sometimes even in your profession. It is so important, that we recently wrote a whole blog post about what credit score is needed to buy a house.
Improving your credit score should be one of your main goals in 2019, and here are some tips on how to do that:
- Always pay the monthly minimum payment on time to avoid any late payments. Late payments will immediately drop your credit score.
- Length of time is important, try to keep older credit accounts open. This can show financial responsibility through proper credit management over a long period of time.
- Diverse credit is often favored, do not be concentrated in one debt type. Student loans, credit cards, car loans, and personal loans are all common types of credit.
- Just because you have been provided a credit limit, does not mean you should go out and spend all the money available to you. Staying below a 35% debt vs credit limit ratio may help improve your credit score.
Credit score will not just help you when preparing to buy a home, it will prepare you for many live events. As a goal, you should aim to get your credit score above 720 if possible. There are still many loan options available for all different credit scores and financial situations. If your score is above 580 there is a chance we have a home loan option for you.
Create your Success Team
With any goal, it is important that you do not hide it. Embrace your goals, get excited, and set up your success team who can help hold you accountable to reach them. By writing down your goals and asking for help, you have a very likely chance at reaching these goals in 2019.
Let’s create your personal success team today and make sure you reach your home purchase planning goals for the new year. Some people who may be willing to help are your friends, a significant other, or maybe even a family member. A Loan Officer, Financial Planner, or Real Estate Agent may also be another great choice. By choosing two people, your odds of success will also increase.
At West Coast Mortgage Group, any of our team members would be happy to help you stay on the path toward home ownership and successful achievement of your goals. Any of our Loan Officers would be happy to help you plan your budget, debt payment plan, savings plan, and/or credit improvement strategy. This is something that we help our clients with every day to ensure their success. If you would like us to assist you with your home purchase or mortgage planning, call us at any time for a free live consultation or schedule a meeting and we would be happy to help.