Getting Your Finances In Order
Once you have decided to purchase a home, you should do a financial inventory to determine your ability to secure a mortgage and to identify problem areas, if they exist. By assuring that your finances are in order, you enhance your ability to secure a mortgage at a favorable rate.
The following steps will assist you in getting your finances in order.
Create a budget and live by it. Review your receipts and bills from the past six months to estimate your monthly expenses accurately. Remember to build in money for unexpected expenses like doctor visits, car repairs, etc. Then, commit to living by your budget as closely as possible.
Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 and 28 percent of income, you need to get the rest of your installment debt – car loans, student loans, credit cards – down to between 8 and 10 percent of your total income.
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 will probably see some great ways to save.
Increase your income. It may be necessary to take on a second, parttime job to pay down debt or get your income to a high enough level to qualify for the home you want.
Save for a down payment. Although it is 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 down payment.