Deciding to make the move from a renter to homeowner is challenging for nearly everyone. There are a number of decisions that one needs to make prior to even signing the deed to a home. For many, purchasing a new home is the biggest purchase one will make in his/her lifetime. The highest hurdle for most first-time buyers is saving enough money for a down payment. If it is a main priority to become a homeowner within the next few years then you will likely need to make some aggressive moves, which may include:
- Cutting spending
- Saving more
- Boosting income
The reality is that saving for a home takes some patience and determination. A good budget plan begins one or two years before the buyer makes an offer. If buying a home is the main goal of an individual, then it needs to be one’s main priority.
Let’s delve into some of the best ways to increase your savings, which will ultimately lead to purchasing a new home.
Stay On A Budget
Once you have made the decision to save up for a new home, it’s firstly important to put yourself on a budget. While it may be hard, it’s important for one to realize that the end result will be well worth all the savings. A serious aspiring homeowner will be able to pass up those small frivolous purchases in exchange for knowing that home ownership is in reach.
The first step in budgeting for a new home is to add up all of your monthly expenses. Start by adding up every source of income that comes into your checking account each month. Next, you should write down your monthly expenses, which can include: rent, utilities, transpiration, food, medical, recreational, etc. Once all expenses are totaled you will be able to see how much money is left over to put towards savings. If you find that the bottom savings line is less than you had hoped, it may be time to start to make some changes in your lifestyle.
Take a critical look at all of your frivolous expenditures such as gym memberships, vacations, and entertainment to see where you can cut back to meet your savings goal. While you don’t want to drain all the enjoyment out of your life, you can keep spending in check without sacrificing much.
Remember, a change in lifestyle may only be temporary and the payoff will ultimately result in homeownership. The less you spend prior to applying for a mortgage, the more you will have saved which can help you afford your home of choice. Lenders want to see that there is a pattern of savings, and buyers will need at least 3.5% for a down payment on an FHA loan or at least 10% for a conventional loan.
Build Up You Credit Score
When the time comes to secure a loan at the best mortgage rate, a good credit score will make the process a whole lot easier. The most important focus for all potential buyers should be improving his/her credit score. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate.
To improve their credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30% of the credit limit on every account. Also, it is best to have three to five credit accounts such as a car loan, student loan or credit card, for one year or longer. The multiple accounts paid off on time shows that the buyer is responsible enough to potentially pay a mortgage.
Experts in the field strongly caution against frequently switching credit cards to get the best rate since lenders do not want to see a lot of credit inquiries or too many new accounts. The reason is that this could indicate someone who is about to take on a lot of extra debt.
Speaking of debt, experts in this field recommend severely reducing your debt before evening thinking about applying for a mortgage. If possible, one should pay off all non-mortgage debts before taking the leap into home ownership. Owning a home may taint the American Dream if you are unable to keep up the home after it is purchased.
If your debt-to-income is over 50%, you need to pay off your debt before even thinking of buying a home. It is also recommended that buyers wait until you have a fully funded emergency fund to cover any unexpected expenses that come your way. Paying off debt tops saving in terms of priorities because of the interest payments on the debt, which exceeds the amount of interest you can earn on your savings. Lenders want to see that you are managing your debt and keeping your credit card balances low. Not only that but buyers will need enough cash to put at least 10–20% down on your new home.
Do Your Research
Before a buyer even decides to pull the trigger on a home offer, it’s important to do some thorough exploration. One should search the marketplace and be realistic and practical in the home that one is saving towards. Although it might be premature to visit a lender two years prior to a home purchase, it can be valuable for consumers to know if they qualify for a mortgage. It can also be beneficial to visit open houses so you have a realistic idea of what you will be able to afford. Oftentimes starting to see what is on the market can get an individual excited and psyched to start saving up for his/her first home.
Although it can seem overwhelming at times, saving up for a home can easily be achieved with the right focus, effort and desire. For serious prospective homebuyers it is necessary to set up a timeline and an overall savings goal. This will allow the buyer to stay on track and, with a little patience, will make the end goal of home ownership a reality!