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Planning to Buy a Home in the Next 12 Months? Follow These 4 Steps
As any homeowner will tell you, buying a home is no simple task. However, the joy and happiness of closing on a home make dealing with the challenges worth it. If you’ve set your sights on owning a home in the next 12 months, it is important to get your finances in order, and this article by Properties Online will help you do just that.
Create a Budget
MoneySavingExpert.com notes that a budget will provide you with a clear roadmap towards attaining your goal of homeownership. The easiest way to create a budget is to subtract your total income by your total expenses. Your income includes salary from your job and side gig in addition to any passive income earned from investments. Expenses will include a larger list such as:
- Utilities
- Food
- Transportation
- Medical
- Recreation
- Existing debt payments
In addition to these, you will also need to include all future expenses related to owning a home like:
- Monthly mortgage payments
- Moving costs
- New utility costs
Once you have made a budget, you’ll have a clear idea relating to the properties you should bid for and the ideal mortgage repayment period and interest rate to apply for.
Pay Off Older Debts
Your credit score plays a major role when it comes to bidding for a home and applying for a mortgage. As reported by credit.com, there are two different credit scoring models, however, each is scored on the same 300–850 scale. The average score in the US in 2020 was 711.
A higher score allows you to get faster mortgage approval with favorable terms. Additionally, the seller will feel confident dealing with you over other buyers with lower scores. If you currently have a low credit score, it is essential to work towards increasing it before starting your home buying process. Here are a few ways to do just that:
- Prioritize repaying all existing debt such as personal loans, credit card bills, bank overdrafts, etc.
- Develop the habit of paying dues on time. When it comes to credit card bills, make it a point to always pay before the due date.
- Keep your credit utilization to the minimum. For instance, if you have a credit limit of $5,000, aim to use less than 30% of it.
It’s important to ensure that you don’t take on new debts. If you are an entrepreneur, organizing your business as an LLC can help you avoid additional personal debt. The business, as a separate legal entity, can hold the debt instead. What’s more, an LLC has certain tax advantages versus other structures like a corporation, and far less paperwork is required to form. Consider enlisting the help of an online formation service to complete the process for you, which can be accomplished affordably and quickly.
Maintain a Reasonable Debt to Income Ratio
This ratio indicates how much of your monthly income goes towards debt payments. To calculate your ratio, divide your total monthly debt by the gross monthly income. Multiply this number by 100 to convert it into a percentage. Having a debt to income ratio between 20-30% is considered ideal, however, some lenders will accept scores in the low 40% as well. If your ratio exceeds 50%, lenders will greatly scrutinize your application and may suggest reapplying once you have a lower ratio.
A strong debt to income ratio gives lenders the confidence that you will be able to afford the mortgage payments from your income. Harvest points out that the steps to improve your ratio are similar to increasing your credit score – i.e., focusing on reducing debt, making timely payments, and having a clear repayment plan.
Buying a Home As-is
If you’re an avid DIYer, buying a home “as is” can be a fruitful option. As the name suggests, the property will be sold in its current condition by the seller. Often these properties are foreclosed by banks or inherited by individuals who want to sell them ASAP, resulting in attractive low prices. However, to transform the property into a liveable home you will need to:
- Conduct a thorough inspection and find all areas of improvement
- Spend time and resources towards repairs
- Likely live in the property while repairs are being done
But, you will reap the benefits of requiring a lower mortgage and cheaper monthly payments. Additionally, the improvements will lead to an increase in your property’s value. While buying a home “as-is” sounds like an attractive option, it’s important to take stock of the time, effort, and resources you’ll need to invest towards improving the property.
Proper debt management will help you develop stronger personal finances, which will be a driving factor to afford and maintain your dream home.