Buying a home is the most expensive purchase you’ll ever make. It’s also an emotional and potentially stressful experience for most people. There’s a lot of information you have to absorb to make wise homebuying and financing decisions.
Before you start house hunting, you want your credit to be in great shape. Establish a record of paying your bills on time. Avoid taking out any new loans or applying for any new credit cards in the months before you start looking for a house. Pay off as much debt as possible to help you qualify for the loan and to give you more expendable income after you move in.
Check your credit report. It’s the first thing a lender will do when you apply for prequalification or a mortgage. Make sure there’s nothing in the report that’s inaccurate or will raise a potential lender’s eyebrow, and be prepared to explain any late or missed payments.
Review your entire financial situation. If you haven’t already prepared a net worth statement, now’s the time to do it. Ditto for a budget.
You may think buying your dream house is worth any sacrifice, but years of doing without the enjoyment of vacations, new cars, eating out, decorating, or a myriad of other simple pleasures can make your dream house feel like a jail. It can also put a strain on your relationship with your spouse or partner. One rule of thumb is to buy a house that costs less than two and a half times your income. If your income is $50,000 a year, try to keep your home price under $125,000.
A down payment is the amount of money you pay up front when you buy property, and it reduces the amount of money you need to borrow. The larger the down payment, the smaller your loan and monthly payments will be. However, it can be difficult to save enough for a sizeable down payment and closing costs that require cash (real estate transfer taxes, escrows for property taxes and insurance, title insurance, attorney fees, loan origination fees, and so on).
Use Your Equity
If you’re selling a house, use any equity you have in it to apply to the down payment on the new house. You won’t have access to those proceeds until the property sells, so try to time your closings in a way that doesn’t leave you without a down payment and responsible for two mortgages.
One way is to go on a crash budget for a few months by cutting your spending to the bare minimum and saving as much cash as possible. Another method is to sock away all the extra money that comes your way: income tax refunds, overtime, bonuses, cash gifts, or—if you’re lucky—lottery winnings.