Becoming a homeowner is one of the most rewarding financial moves you can make in your adult life, however, the process to get there can be a bit overwhelming at times. Here are a few money management tips to help you navigate financial situations before, during, and after the home buying process and help you enjoy this major life milestone.
Start saving for a downpayment and closing costs
When you start looking for a home, you will first need to consider how much you plan on using towards a down payment. This amount will determine many factors in your approval package such as the overall cost of the home, rate, and the type of mortgage you can obtain.
Traditionally, it has been recommended that potential homeowners put down around 20% of the total cost of the home, but there are certain mortgage options that allow you to put down closer to 3.5%. Remember, it is better to start saving earlier rather than later because even though you might be able to put down less than the recommended 20%, even a small down payment percentage of 5% is still $12,500 on a $250,000 home.
Additionally, you will want to account for closing costs when calculating how much to save. Closing costs can widely vary depending on the bank you finance through, so it is important to do research beforehand and shop around different terms once you receive your pre-approval.
Research mortgage options
As previously mentioned, there are different types of mortgages you can secure when purchasing your first home. When you consult with your bank, they will go over a series of questions about your finances to determine the best type of mortgage for your situation. Debt-to-income ratio is one of the main factors that goes into determining your type of mortgage, along with the amount you will be preapproved for. The bank will also look at other various factors such as credit score, job history, down payment amount, and any assets you may have.
The main types of loans to be aware of include:
Conventional- A conventional loan requires a higher down payment and higher credit score than other types of loans. While there are stricter requirements for credit score and down payment, there aren’t as many provisions on the total amount you can finance.
FHA- An FHA loan is a federal loan that allows individuals who have less of a down payment (as low as 3.5%) and a lower credit score to obtain a mortgage. To secure an FHA loan, you must meet certain criteria and guidelines based on your income, credit, and debt-to-income ratio. Remember, on an FHA loan, you must pay private mortgage insurance (PMI) each month.
USDA- A USDA loan is also known as a Rural Development Loan that is sourced through the United States Department of Agriculture to encourage homeownership and development in rural areas throughout the country. These loans can be more difficult to obtain because they have numerous qualifications that must be met both on the buyer’s end and based on the location of the home you intend on purchasing. While this type of loan can be more difficult to obtain, they are attractive to individuals who might not have as much to put towards a down payment because they require 0% down in most cases.
Adhere to your budget
Once you have received your pre-approval and picked an agent to work with, you are ready to start home shopping! This is an exciting time and it can get easy to get caught up in the moment of searching for your dream home. Even though you might have received a pre-approval from your bank for up to a certain amount, make sure you can realistically afford the payment associated with being at the top end of your pre-approval.
For this reason, it can be helpful to determine a personal budget based on the amount you feel comfortable spending each month according to your lifestyle and feel tempted to go over this amount when you are searching for your home. Additionally, remember to account for taxes in this budget and make sure to check the tax amount before falling in love with a home.
Monitor your credit and monthly payments
When you are searching for your new home, it is crucial to be mindful of your credit score, monthly obligations, and anything that would be detrimental to your pre-approval. Most likely, the bank that you are financing through is monitoring your credit throughout the entire process. This means that if something were to change, it could result in having to go through the pre-approval process all over again. Be sure to keep up to date with your monthly payments so that you don’t risk a derogatory mark on your credit report. Additionally, wait to open any new accounts or make large purchases until after you close on your home.
Make sure that you are protecting your new asset
Congratulations! The stress of the home buying process is over and it’s time to start making your new house a home. After you close, you can take a sigh of relief and start focusing on this new chapter in your life. While this is certainly a time to celebrate, remember that there are still important steps to take to protect your new asset and ensure long-term financial stability.
This is a good time to reevaluate your budget based on new expenses that may arise with homeownership such as higher utility bills, repairs, and other general maintenance costs. Because this is most likely one of the largest purchases you have made in your life thus far, it is important to find ways to protect this asset through insurance policies. If you already secured a homeowner’s insurance policy prior to closing, remember to update the policy if you make updates on your home or purchase furniture and items that cost more than you anticipated when you originally designated a coverage amount.
Additionally, setting up a life insurance policy or reevaluating your current policy is an important step to take after closing to protect your home as an asset if you have a mortgage. If you have a family, this is even more crucial because if you were to unexpectedly pass away, you want to make sure that they can still make the payments on your home without your income.
Account for after move-in expenses
After you move into your home, there are inevitably going to be expenses you incur that you might not have expected. For example, you might want to paint or make even larger home improvements once you have spent some time in your house. Also, if you are purchasing a home with much more room than your prior residence, little things such as stocking second and third bathrooms, curtains for guest bedrooms, and storage solutions for basements all add up. This is why it is important to be diligent about budgeting and financial planning to ensure that you have a buffer for these expenses so that you don’t start racking up credit card debt.
When purchasing a home, you are inevitably going to inherit more responsibilities. This is why it is important to be diligent about managing your finances before, during, and after the process to not only guarantee that you are making the right purchase, but to ensure long-term financial success for years after you close on your home.
About The Author: Nathan M. has experience in the financial sphere and specifically enjoys writing about topics surrounding investing, homeownership, and financial independence. In his free time, he enjoys running, being outdoors, and trying new spicy cuisine around town.
Photo by Morning Brew on Unsplash
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