Updated: Jun 8, 2022
Dear Shanon, I want to buy a house. Where should I start and how should I budget?
A good budget plan begins now. Here are five tips to start today if you’d like to see home ownership in your future.
Check Your Credit Score: This number helps you qualify for an affordable mortgage through a bank or lending institution. There are a lot of great websites where you can request your free credit report online. It’s also important to check your score so you can fix any mistakes to avoid any surprises when you are in the process of purchasing your new home.
Raise your Credit Score: When the bills come in the mail-open the envelope, write the check, post the date if you need to, and send it off. You can also save money if you pay your bills online or set up auto-pay, as some companies offer discounts if you go paperless. If you are past due on your bills, talk to the creditor and try to work on a payment plan to reduce the balances to less than 30 percent of the credit limit on every account. Also, try to have three to five credit accounts, such as a car loan, student loan, or credit card, for one year or longer.
SAVE SAVE SAVE!: Create a simple budget and set a savings goal. If your monthly rent is currently $800 and you anticipate your monthly mortgage will be $1,000, then practice making a future house payment by setting aside $200/month into a savings account. You’ll have $2,400 in just 12 months! That can go towards your down payment as lenders want to see a pattern of savings, and buyers will typically need at least 1% to 5% down on a conventional loan, or 3.5% for a down payment on an FHA loan. Keep it simple and set up an automatic transfer from your checking into a savings account and soon enough those funds will be “out-of-sight-out-of-mind” and you’ll figure out a way to work with what you have.
Debt-to-income ratio: It is an important element in loan approval. This ratio compares minimum monthly payments on all debt, including your house payment, to your gross monthly income (before tax deductions). If your debt-to-income ratio is over 45 percent, you will likely need to pay off some of your debt before even thinking of buying a home. Some lending companies will permit a higher ratio for borrowers with a strong credit score or substantial cash reserves, but in general, 43% is the standard debt-to-income ratio for FHA and conventional loans.
Get a Plan Together: While it might be premature to visit a lender until the above is lined up, it can be valuable for consumers to know if they qualify for a mortgage, as a lot of people have no idea what $100,000 or $200,000 will buy. Having a ten-minute discussion with your local Lender about your employment history, credit score, income, etc. can help put you on a customized plan for purchasing your future new home!
Real Estate Broker, Licensed in the state of Oregon
Published May 2017
Shanon holds an MBA in International Business, loves writing in her “At Home with Shanon” column that has been delivered to 47,000+ homes in Medford since 2014, has appeared on the Real Estate Radio Show, and was also featured on A&E TV network’s Real Estate Reality TV show.