What You Need to Know Before Buying a Home
By Claudia Mollerup-Madsen
Summer is a smart time to buy a home. While spring time features a large inventory, staying patient through summer months can offer homebuyers good deals and high selection. Every homeowner knows the value that their home brings to their investment portfolio and to everyday life. If you’re in the market to own a home this year, whether it’s your first or second home, you want to make the most out of the purchase.
The most crucial step in doing so, is your preparation. Take the time to prepare by checking your credit, reworking your budget, saving, researching the real estate market, and reviewing your financing options.
There are a couple of thing to do before purchasing a home: Before you house hunt, give yourself time to raise your credit score and lower your debt. Credit is vital when purchasing a home as it will dictate which interest rate and loan amount you will qualify for.
Lowering your debt starts with reworking your budget; you can do that by determining which expenses may be unnecessary and removing them. With the additional money that you have from reducing expenses, consider channeling that money towards paying off debt. Consider paying off debt that can be paid off quickly to see an immediate boost in your credit score.
While reducing debt should be your primary goal, a secondary goal should be to save while paying off debt. Track your expenses over several months to determine your cash flow; then save what remains after each month. Once you do this, you will then have a better estimate for your down payment and monthly mortgage payment. In general, it’s best to spend less than 30 percent of your monthly income on home expenses, such as the mortgage and utilities.
Furthermore, whether this is your first home or not, look for a home that is less expensive than your pre-qualified amount. Doing so will allow you enough wiggle room to put extra money towards an emergency fund, retirement plan, and savings account. As a reminder, don’t forget about yearly payments for property taxes, yet another reason you should find a home that fits into your monthly budget.
Even if this is not your first time purchasing a home, the preparation may look similar. Before house hunting, you should take the time to rework your budget, giving yourself a clear representation of how much of an upgrade you can afford.
When you have saved enough for a down payment, you should begin to research your financing options. If you are a first-time home-buyer, you will have plenty of financing choices to help you including federally-backed loans and loans geared toward home-buyers that don’t require a 20 percent down payment. Do some research to see which loan makes the most sense for your budget.
Once you have closed on the home and it’s officially yours, continue your savings focus. It can be tempting to purchase new furniture all at once, but focus on staying within your monthly budget. Putting extra money into an emergency fund and retirement accounts even after you have bought your home is instrumental to financial peace. As with all major changes to your portfolio, ensure you are consulting your financial advisor who can continue to help you meet your lifetime goals.
Claudia Mollerup-Madsen is Vice President and Financial Advisor for Morgan Stanley in Houston.