7 Steps to Getting Your Finances in Order
Prior to Buying Your Home
1. Develop a budget. Instead of budgeting what you’d
like to spend, use receipts to create a budget for what you actually spent
over the last six months. One advantage of this approach is that it factors
in unexpected expenses, such as car repairs, illnesses, etc., as well
as predictable costs such as rent.
2. Reduce your debt. Generally speaking,
lenders look for a total debt load of no more than 36 – 40 percent
of income. Since this figure includes your mortgage, which typically ranges
between 25 percent and 28 percent of income, you need to get the rest
of installment debt—car loans, student loans, revolving balances
on credit cards—down to between 8 percent and 10 percent of your
total income.
3. Get a handle on expenses. You probably
know how much you spend on rent and utilities, but little expenses add
up. Try writing down everything you spend for one month. You’ll probably
see some great ways to save.
4. Establish a good credit history. Get
a credit card and make payments by the due date. Do the same for all your
other bills. Pay off the entire balance promptly. Do not make any large
purchases too close to your home search.
5. Save for a downpayment. Although it’s
possible to get a mortgage with only 5 percent down—or even less
in some cases—you can usually get a better rate and a lower overall
cost if you put down more. Shoot for saving a 20 percent downpayment.
6. Create a house fund. Don’t just
plan on saving whatever’s left toward a downpayment. Instead decide
on a certain amount a month you want to save, then put it away as you
pay your monthly bills.
7. Keep your job. While you don’t
need to be in the same job forever to qualify, having a job for less than
two years may mean you have to pay a higher interest rate.
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