There’s no such thing as being too prepared to buy a home. The more time you have to get your finances in order, the better. Taking certain steps while you’re still in the planning stage can make the home-buying process less stressful in the future. If homeownership is part of your five-year plan, here are several steps you’ll need to begin taking now.
Find out now: How much house can I afford?
1. Decide How Much You Want to Spend
Before buying a home, you’ll need consider how much you’re willing to spend. But creating a home-buying budget five years in advance can be tricky, especially if you’re expecting your income to increase.
One way to prepare for a future home purchase is to look at where your income currently stands. Then, you can think about how much you expect to spend on housing-related expenses like a mortgage, insurance, taxes and maintenance.
From there, you can think about how much house you can afford based on what you’re already earning. That should give you a good starting point. If you accumulate more wealth later on, you can adjust your plan.
2. Start Saving for Your Down Payment
A down payment is an important part of the home-buying puzzle for a couple of reasons. First, it’ll come into play when you try to apply for a mortgage. If you can afford to put 20% down, you might be able to qualify for a conventional loan. But if you can only come up with a 3.5% down payment, you might be better off applying for an FHA loan.
Besides influencing the kind of mortgage loan you qualify for, the size of your down payment will affect your future financial situation. The less money you have to borrow, the less owning a home will cost in the long run. That’s why it’s important to start putting away money for a down payment as soon as possible.
3. Get Your Credit in Shape
If you have bad credit, you could get stuck with a higher interest rate when you apply for a mortgage. Or your lender could reject your application altogether. Fortunately, if time is on your side you have time to improve your credit.
If your score isn’t as high as you’d like it to be, you can get back on track by changing your financial habits. Paying all of your bills on time and using 30% of your available credit (or less) can help. So can disputing any errors on your credit report and keeping your applications for new credit to a minimum.
Get your free credit score now.
4. Pay Down Your Debts
Besides credit scores, lenders also look at debt-to-income ratios when deciding whether to approve someone for a mortgage loan. If you’re using a large portion of your income to pay off debt, that won’t look good in a lender’s eyes. In fact, you may have a hard time getting the green light for a mortgage.
If you don’t have a plan for paying off debt, it’s a good idea to create one. To get started, you can look at your interest rates and the amount of debt you owe. If you have a lot of credit card debt, consider consolidating it with a 0% interest rate card. If you have a lot of student debt, consider refinancing your student loans to snag a lower rate.
If you can lower your interest rates, you can work on paying down those debts aggressively. Even if you can’t wipe them out in five years, you can at least make a significant dent in what you owe.
5. Beef up Your Savings
Besides a down payment, you’ll also need to have some cash in reserves before you buy a house. If a tree falls on your home, your homeowners insurance may cover the repairs but you’ll likely have to pay a deductible first. That’s where an emergency fund can come in handy.
As you save up for your down payment, don’t forget to set aside some money for emergencies. It’s best to have enough money to cover three to six months’ worth of expenses so that you’re prepared in case disaster strikes.
Check out our down payment calculator.
Photo credit: ©iStock.com/XiXinXing, ©iStock.com/Photobuay, ©iStock.com/razerbird