Planning a home purchase isn’t something that you should just jump into without some careful planning. It pays to get yourself in the best financial position before you do anything as this can potentially make or break your plans. Here are some tips for planning your house purchase from a financial point-of-view.
Look at your credit score
Lenders will use your credit score and credit history to work out how much of a risk it may be to approve you for a mortgage so you can help your cause by making sure that your credit report is in order. If you’ve got a history of being late with payments or missing them altogether, you’ve got a definite red flag against you as far as lenders are concerned. Look at it from their perspective: you’re asking them to lend you a large amount of money so they’re going to want to know that you’re a safe bet and don’t have a history of getting behind with payments or running up lots of debt. If your credit score is poor, expect to be saddled with unfavorable interest rates or in some cases, your application may be refused altogether.
First of all, you need to know what your credit score is so that you can assess the potential impact on your ability to get a mortgage. There are three major reporting agencies: Experian, Equifax and TransUnion. Each one has a different method for calculating credit scores so it’s advisable to get a copy from all three. This isn’t free but it’s well worth doing, especially if you find that your credit score is being dragged down by errors. This can be easily corrected by contacting the relevant reporting agency and notifying them of the error, although it may take several months for the mistake to be rectified. If your score isn’t all it could be, making payments on time with no defaults is one of the best things that you can do to improve it.
Don’t overstretch yourself
Ask yourself, how much can you borrow? You’re typically advised to arrange a mortgage that is two and a half times larger than your yearly salary but this won’t be a realistic proposition for everyone as your income, debts and outgoings will have a big impact on what you can realistically afford to take on in terms of mortgage repayments. If this is the case for you, be prepared to settle for borrowing a lesser amount so that there’s less chance of biting off more than you can chew. Another common piece of advice focuses on ensuring that your house-related payments don’t account for any more than 36% of your monthly income.
There are various mortgage calculators that can help you to decide how much you should borrow but for a more personal and accurate gauge, you may be better off consulting a professional who can advise. One option is to look into being pre-approved by a lender. This will take into account your financial situation and suggest the most sensible course of action based on this.
Making a down payment
If you don’t want to be paying off a large mortgage, you can reduce the burden by making a bigger down payment instead. It’s common for lenders to request a down payment of 20% of the asking price and although it is possible to secure a mortgage with a lesser down payment, you will probably be required to pay a bit extra for mortgage insurance so that the lender can cover themselves if you default on the repayments. Remember, however much you plan to put forward as a down payment, don’t forget to factor in fees (such as closing costs), which can be more expensive than you might think.
Buying a house is a serious decision and it should not be taken lightly or rushed in to. Take the time to do the research and get yourself in the best financial position possible before signing on the dotted line.
So, do you own a home? What kind of steps did you take to get ready to buy a home?
I have heard of this trick before. I think it is brilliant. It is a great way to build the habit in place and find out if you can actually make it work.
Thats the plan my sister is starting to make. Putting aside her future mortgage payment into a separate account. She also researched what the extra monthly costs will be and starting that aside as well.
I am so glad to hear your sister has the insight to do this. That is great. It really will put her ahead of the game later on and she will be able to make an educated decision.
I agree–the cautionary tone is great–it is something my generation lacks! I just hope I don’t end up with a house that is smaller than my hand….like up above…haha
I would advise not owning a home when starting your career just out of college. Homes are very expensive and are no longer the safe investment they once were. Rent a home at first, save a large down payment, and research what you want in a home before jumping in. You will probably be in the home for longer than you think!
Wise advice. I would say I agree. I bought my first house when I was younger and it worked ok until I wanted to go back to school and couldn’t afford it. I definitely recommend buying a home when you have a better financial foundation in place.
Excellent tips. I started working on improving my credit score a few years ago and I now am in the “excellent” range with Transunion (I really need to check my actual FICO). I’m now trying to save enough for a decent down payment. The trickiest part is the 3x my income range – not many homes in my area fit into this category! However, I won’t stretch myself so I’ll just wait until I find the best fit.
Congrats on boosting your credit score. That can take time and can the time can be frustrating for many.
I am glad to hear you are going to wait until you find something that fits. This is a smart move. If you bite off more than you can chew you will definitely regret it later. Trust me. I know what you mean about house prices in certain areas though. It seems that in some cities, unless you earn 6 figures and have a ton of savings, you will never be able to buy a house in that city.
I always made sure I could reasonably afford the mortgage payment, property taxes and insurance. I generally thought my total payment should not exceed a week’s wages. Pretty conservative, but it works very well.
A weeks wages…that sounds like a great benchmark. If everyone operated on this principle, no one would have any debt. Great suggestion. Glad to hear it has worked out so well for you.
We’re hoping to buy a house in about five years, hopefully sooner. In 2012, we’re focusing on saving in our Roth so that we can use the money for a down payment in the future.
Sounds like a great plan. Saving up ahead of time to avoid those insurance fees is well worth the wait. Glad to hear you are being smart about this. You will definitely gain from this approach.
I am on my third home! My approach was from a more conservative perspective. Rather than look at howmuch I could borrow, I looked at how much I should borrow. I used a week’s wages as a guide, it kept my debt much lower.
I am with you. Purchasing a home is definitely not trivial. It can have huge ramifications on one’s budget and future plans. I am happy that I was careful with the purchase and didn’t overstretch myself, just like you mentioned.
I think a lot of people make the mistake of buying too much house for their initial purchase. It’s ok to start small and affordable, and then move-up if you have the need and the resources to do so.
Agreed. There is always time to grow and upgrade. This is what we have done. We bought a smaller house that we may outgrow but that isn’t for a while. We have time to build up a bit before we make a change.
I am tempted to look the other way – we have a large, nice house in a desirable area. If we buy a smaller one this will release some capital for other financial adventures. Need to work out some options.
I am absolutely scared of what is going to happen to Canadian mortgages in a few years when interest rates inevitably start to climb. Despite repeated warnings, we are now more in debt than the average American citizen. I really wish we would wake up and get stingier with mortgages and that people would use a little financial literacy-based common sense!
There is that old saying that “common sense isn’t so common.” I totally agree with you. People in Canada need to be acting with caution not throwing it to the wind or we will end up in the same dire situation our southern pals are.
A big one for us, was holding out until we found the right house before we bought. We viewed a lot of houses (which likely drove our agents nuts) but we refused to settle on a home we would want to leave. RE expenses are far too high to make the wrong choice.
We went through something similar. We stayed focused on what we wanted until we found the perfect fit. It was well worth the wait. We love our house and the area it is in.
I was obsessive about our credit score before buying our home this summer. No new credit inquiries, no new credit cards, paying all bills early!!! And we love our new to us, condo 🙂
That’s great to hear Barb. It really is a great feeling when you can live in your home and love it vs. being stressed about it. Glad to hear your move has been worthwhile.
The main step I took when I was planning to buy my home was to not over stretch my self. We wanted to make sure our home didn’t derail our other goals. So, we bought our home based on it not being more than 25% of our net income per month.
That is a great ratio to go by. 25% is easily affordable. I am glad you had the foresight to know to look at this prior to purchasing. So many people don’t. How did you fair with all of the housing price changes in the USA? Did you lose a lot of money?
Great post- I like the cautionary tone of it 🙂
A good idea is to practice “paying a mortgage” by socking away that amount of money per month to see how it is being handled.
I have heard of this trick before. I think it is brilliant. It is a great way to build the habit in place and find out if you can actually make it work.
Thats the plan my sister is starting to make. Putting aside her future mortgage payment into a separate account. She also researched what the extra monthly costs will be and starting that aside as well.
I am so glad to hear your sister has the insight to do this. That is great. It really will put her ahead of the game later on and she will be able to make an educated decision.
I agree–the cautionary tone is great–it is something my generation lacks! I just hope I don’t end up with a house that is smaller than my hand….like up above…haha
lol. Oh John, you are always good for a chuckle. I agree with you about our generation though. They are a lot less cautious than they could be.
I would advise not owning a home when starting your career just out of college. Homes are very expensive and are no longer the safe investment they once were. Rent a home at first, save a large down payment, and research what you want in a home before jumping in. You will probably be in the home for longer than you think!
Wise advice. I would say I agree. I bought my first house when I was younger and it worked ok until I wanted to go back to school and couldn’t afford it. I definitely recommend buying a home when you have a better financial foundation in place.
Excellent tips. I started working on improving my credit score a few years ago and I now am in the “excellent” range with Transunion (I really need to check my actual FICO). I’m now trying to save enough for a decent down payment. The trickiest part is the 3x my income range – not many homes in my area fit into this category! However, I won’t stretch myself so I’ll just wait until I find the best fit.
Congrats on boosting your credit score. That can take time and can the time can be frustrating for many.
I am glad to hear you are going to wait until you find something that fits. This is a smart move. If you bite off more than you can chew you will definitely regret it later. Trust me. I know what you mean about house prices in certain areas though. It seems that in some cities, unless you earn 6 figures and have a ton of savings, you will never be able to buy a house in that city.
I always made sure I could reasonably afford the mortgage payment, property taxes and insurance. I generally thought my total payment should not exceed a week’s wages. Pretty conservative, but it works very well.
A weeks wages…that sounds like a great benchmark. If everyone operated on this principle, no one would have any debt. Great suggestion. Glad to hear it has worked out so well for you.
We’re hoping to buy a house in about five years, hopefully sooner. In 2012, we’re focusing on saving in our Roth so that we can use the money for a down payment in the future.
Sounds like a great plan. Saving up ahead of time to avoid those insurance fees is well worth the wait. Glad to hear you are being smart about this. You will definitely gain from this approach.
I am on my third home! My approach was from a more conservative perspective. Rather than look at howmuch I could borrow, I looked at how much I should borrow. I used a week’s wages as a guide, it kept my debt much lower.
I think that is a great calculation to use. You would always avoid getting in over your head by using this. Great recommendation.
I am with you. Purchasing a home is definitely not trivial. It can have huge ramifications on one’s budget and future plans. I am happy that I was careful with the purchase and didn’t overstretch myself, just like you mentioned.
Glad to hear you used caution with your purchase. We also did and are in much better shape than some of our peers. It is well worth it.
I would also purchase a home that is just enough for your need. Don’t buy a big home with an eye toward the future. You can always upgrade later. 🙂
True enough. This is the wise choice and I would hope the most common. This is what we have done.
I think a lot of people make the mistake of buying too much house for their initial purchase. It’s ok to start small and affordable, and then move-up if you have the need and the resources to do so.
Agreed. There is always time to grow and upgrade. This is what we have done. We bought a smaller house that we may outgrow but that isn’t for a while. We have time to build up a bit before we make a change.
I am tempted to look the other way – we have a large, nice house in a desirable area. If we buy a smaller one this will release some capital for other financial adventures. Need to work out some options.
Good point Maria. Downsizing does have it’s perks and it could open up some doors for some opportunities. There is always two sides to every coin.
I am absolutely scared of what is going to happen to Canadian mortgages in a few years when interest rates inevitably start to climb. Despite repeated warnings, we are now more in debt than the average American citizen. I really wish we would wake up and get stingier with mortgages and that people would use a little financial literacy-based common sense!
There is that old saying that “common sense isn’t so common.” I totally agree with you. People in Canada need to be acting with caution not throwing it to the wind or we will end up in the same dire situation our southern pals are.
A big one for us, was holding out until we found the right house before we bought. We viewed a lot of houses (which likely drove our agents nuts) but we refused to settle on a home we would want to leave. RE expenses are far too high to make the wrong choice.
We went through something similar. We stayed focused on what we wanted until we found the perfect fit. It was well worth the wait. We love our house and the area it is in.
I was obsessive about our credit score before buying our home this summer. No new credit inquiries, no new credit cards, paying all bills early!!! And we love our new to us, condo 🙂
That’s great to hear Barb. It really is a great feeling when you can live in your home and love it vs. being stressed about it. Glad to hear your move has been worthwhile.
The main step I took when I was planning to buy my home was to not over stretch my self. We wanted to make sure our home didn’t derail our other goals. So, we bought our home based on it not being more than 25% of our net income per month.
That is a great ratio to go by. 25% is easily affordable. I am glad you had the foresight to know to look at this prior to purchasing. So many people don’t. How did you fair with all of the housing price changes in the USA? Did you lose a lot of money?