Take Control of Your Finances Before You Buy a House
Buying a house is not something you do on a whim. It takes time, planning, and attention to details. Your debt is one such detail. For your best chances at buying a home with a decent interest rate, you’ll want to spend 6–12 months working on your credit and debt load before you get serious about your home search.
But Why? Even if your credit score is top-notch, there are plenty of other reasons that you have to pay attention to your finances and debt in the months leading up to the home purchase. Your debt-to-income (DTI) ratio, for example. This is the way that banks measure how much money you spend every month on your financial obligations. Debts can include things like your mortgage payment, HOA fees, car loans, and credit card payments.
Employment Matters
If you are self-employed and considering buying a home, it’s important to be aware that lenders will scrutinize your employment history more closely. They will typically look back at your past employment records to assess the stability and reliability of your income. While it is certainly possible to purchase a home as a self-employed individual, the process can be more challenging compared to those with traditional employment.
To minimize potential obstacles and increase your chances of securing a mortgage, it can be advantageous to have a well-established and documented employment situation. This may involve maintaining detailed financial records, such as tax returns and profit and loss statements, to demonstrate the consistency and viability of your self-employment income.
Additionally, having a longer history of self-employment, ideally two years or more, can help build credibility and reassure lenders of your ability to sustain your income over time.
For individuals who have a full-time job and a side hustle, the mortgage application process can be slightly different. Lenders will primarily focus on your primary source of income, which is your full-time employment. However, they may also consider the additional income generated from your side hustle if it has been consistent over a sufficient period.
To strengthen your mortgage application when you have a side hustle, it’s crucial to maintain accurate records of your additional income. This includes keeping track of invoices, payments, and any related expenses. If your side hustle has been profitable and stable for at least two years, it can potentially help you qualify for a higher mortgage amount or improve your debt-to-income ratio, making you a more attractive borrower in the eyes of lenders.
Home Prices
Another important reason that you must pay attention to your debt and income now is that home prices fluctuate. Although you cannot control home prices, you can arm yourself with information by browsing current listings to get a better idea of what’s available and how much you can expect to spend to meet your family’s needs. Researching home prices in your area will help you determine what your savings goal should be for a down payment.
You’ll also want to compare the different types of loans so that you will know what you must do to qualify for each.
Managing Paperwork
Before purchasing a home, managing all of your financial documents efficiently is crucial.
Organizing these important papers—such as your bank statements, tax returns, and pay stubs—can simplify the home buying process.
To make your documents easily accessible and searchable, try to convert to PDF by using an online conversion tool. Digitizing your paperwork not only helps in keeping your financial information secure but also allows for quick retrieval and reference during discussions with realtors, loan officers, or financial advisors. This step can greatly streamline the preparation needed for a successful home purchase.
Choosing to Rent Instead
Since home prices are quite high, getting approved for a mortgage can often be difficult.
However, there are several key advantages to renting that make it a smart choice for many people.
For one thing, renting is typically much more affordable than buying. Renters don’t have to worry about unexpected repair costs or property taxes that come with owning a home. Another important reason to rent is flexibility: even if you think you’d like to buy eventually, renting gives you time to make sure that’s really the right decision for you in the long run.
Debt Management
Now that you have done your research, it’s time to take action. A few steps you can take to get your finances in order over the next 12 months include:
1. Consolidate debt
Consolidating into a single loan can make it easier to keep up with what you owe. You will also save money if you consolidate to a lower-interest loan.
2. Create a budget
Your budget is how much money you have to spend every month. Write down everything you routinely spend money on, including housing expenses, your vehicle, food, insurance, clothing, and entertainment. You may be surprised to find that you’re spending on things that you really should not. For example, that Netflix subscription you haven’t used in six months has cost you $90 or more.
3. Find ways to save
Look for tips and tricks to help you save more. For example, cleaning hacks can help you save on hiring a professional cleaner. Keeping things cleaner at home also means having to replace things less frequently.
4. Check your credit report
Banks, credit card issuers, and other financial services providers are not infallible. They can make mistakes, and these mistakes can affect your credit negatively. The sooner you get errors off of your report, the better. Just how long does it take to fix? In many cases, five months or more, so do not wait until you’re ready to put an offer on a home to know what’s on your credit report.
Buying a house is a big deal, and it’s something that you have to prepare for. Spend some time getting to know your credit situation, from your employment status to your budget. Then, take steps to ensure that you qualify for a loan when the time comes. As fast-moving as the market is today, even a single delay could cost you the house of your dreams. If you’re not ready to purchase a new home, find a suitable rental instead!