Home ownership is a vital part of the American dream, and if you've never had the pleasure of home ownership, you're probably particularly hungry for it. If you've been thinking about purchasing your first home for a while, but you're not certain how soon it'll be a viable option for you, we have a few tips to help get your financial house in order. First...
Reevaluate your household budget.
If you haven't already started creating a budget, now's the time to do so. Need help? Check out recommendations for the best free budget tools online here. Once you've formulated your budget, it's time to...
Calculate what you can comfortably afford.
Many financial advisers recommend that you allocate no more than a 25% of your pre-tax monthly income towards mortgage payments. 20% is even safer. Your total debt (including mortgage payments) should take up no more than 36%.
Using the math above, find out what your ideal mortgage payment would be, and then add in your present debt. If that number exceeds 36% of your monthly pre-tax income, then it's time to...
Eliminate excess debt.
Your two biggest assets in getting approved for a home loan are your down payment and your credit history. Order a copy of your credit report and take care of any overdue accounts or delinquencies as soon as possible, as they will weigh heavily against you in the home loan approval process. Once you've done that, it's finally time to...
Here are some ideas to help you save up as much as possible, as quickly as possible.
- Liquidate your assets.
Do you have a 2nd or 3rd vehicle you never use? Or a storage unit full of stuff you've mostly forgotten about? Convert your assets to cash, and give your savings a nice boost.
- Start “paying” your mortgage early.
Since you've already calculated your ideal mortgage payment, see if it's feasible to set aside a mortgage-payment sized amount every month.
- Bank those big checks.
If you get a big tax return or a bonus at the end of the year, bank it towards a new home purchase. It's always tempting to splurge, but bulking up your down payment can help you realize your dream of home ownership a lot faster.
- Explore options for student loans payments.
Student loan reform has done a lot for your pocketbook, whether you know it or not, especially if your loans are federal. Phone your student loan provider and ask about getting on an income-based repayment plan (IBR).
- Safeguard yourself from yourself - auto-deduct!
If it's hard for you to save, talk to your payroll department about sending a certain portion of your income to your savings account automatically whenever you get paid. If it's really hard for you to save, set up a savings account (and only a savings account) with a bank you don't currently bank with, that way the money is never immediately at your disposal.
If you still have questions about whether home ownership is currently the right choice for you, we have even more tips to help you decide whether to rent or buy.