If you and your partner are considering taking advantage of historically low-interest rates and are looking to buy a home in your area, it can be tempting to rush into things while things seem so affordable. That being said, this sort of eagerness can be incredibly damaging to your finances if you don’t have a sound financial plan for your future. A house comes with a lot of extra responsibilities, which is why you need to be sure that you and your spouse are on the same page before you make such a big purchase.
Of course, every situation is different when it comes to preparing to buy a home since everyone’s finances are different. That being said, there are a few routine things that everyone should do with their money before they buy a house—here are five of the most common.
Check your credit score.
Knowing your credit score is the first thing you should do if you’re getting serious about buying a home. While you might see mortgage lenders advertising super low rates, whether or not you can actually qualify for a 3% interest rate or not depends largely on your credit score. If you have a poor score, you may still qualify for an FHA loan as a first-time buyer, but you won’t be able to get as competitive of an interest rate.
Ensure your investments are on track.
While many people like to think of their home as an investment, the 2008 market crash should make you wary of putting all of your eggs in one basket. As such, it’s important to ensure that you have other investments that you’re working on building up beyond just your home purchase. Mark Wiseman is a globally-renowned investment manager who has a lot to say about how to invest your money effectively. He takes a conservative approach, focusing on safe, but certain, long-term investment strategies that ensure that you have money even in the face of a global financial crisis. One of Wiseman’s most important pieces of advice on the topic is to stay the long haul and hold your stocks, since “if you look at a chart of the Dow Jones over 100 years you don’t see any volatility.”
Pay down excessive debt.
One factor that may make you less attractive to mortgage lenders is how much debt you have. Your debt-to-income ratio is actually more important to some lenders than your credit score, so if you have a high amount of debt from a variety of sources, you might be in trouble when it comes to getting approved for the amount you need for your dream home. Coming up with a strategy and paying down excessive debt is thus important for two reasons. For starters, it helps boost your credit score, which is a major plus when it comes to interest rates. Beyond that, it lowers your debt-to-income ratio and unlocks the potential for a bigger loan.
Save up your downpayment.
Although it’s possible to put as little as 3 or 4 percent down towards your first home purchase, most experts agree that you’ll want a larger downpayment than that if you want to be seen as a serious buyer. At least ten percent is a good idea, although you’ll have to pay Private Mortgage Insurance (or PMI) if you can’t come up with 20 percent of the home’s value. That being said, with interest rates so low, the extra cost of PMI could be negligible.
Stick to your budget.
When it comes to homeownership, it’s more important than ever to stick to a written budget. Your budget is your list of financial priorities and can ensure that you have the proper amount of money needed to cover any unforeseen costs associated with your home or even common fees like utilities and home insurance. Budgeting can even be the difference between saving up your downpayment or not, so it’s a good idea to get budgeting today if you haven’t started yet!