Buying a home is a major financial step. But it can be discouraging if you feel you are ready to take this step, but there are factors standing in your way, like student loan debt. Here are five things you need to do to get ready to buy a home within the next year.
- The first steps in preparing to buy a home are paying down debt and repairing any credit issues.
- As you save up for a down payment, start tracking the market to gain a sense of what to expect while shopping.
- Once you're ready to start shopping, prepare a budget for your new life as a homeowner and start living by it.
Get Out of Debt
One of the most important things you can do is to work on paying down your debt, especially your credit card debt. This will help to improve your credit score and can affect the mortgage you will qualify for.
It may seem like an unnecessary step, but paying off debt means that you will not need to stress as much about finances when you do buy, and everything will be easier. If you are planning on buying a home soon, it is better to pay your debt rather than settle the debt, which does show up on your credit report.
Clean Up Your Credit
It is important to clean up your credit report before you apply for a mortgage. You can start by pulling a copy of your credit report and your credit score to see where you stand. The higher your credit score means you will qualify for lower mortgage rates.
Be sure that you have paid off any debts that are past due or in collections. Then work on paying your creditors on time for the next year. This will help improve your score. Lowering your debt-to-income ratio can help. If you do decide to close some credit cards, be sure to leave the oldest one open, even if you never use it.
If you do not have any credit at all, you may consider using a credit card to establish your credit history. If you do this, then pay off the card in full each month. Any installment loans can help with this, such as student loans or a car loan. You can also use your rental history to help establish your credit rating, so be sure that you are paying on time each month.
Save Up for a Down Payment
Saving up for a down payment can help you prove to yourself that you are ready to purchase a home. It will also likely be a must for qualifying for a mortgage.
Remember, the larger your down payment, the more you will be able to spend on a home. A large down payment can make homes that may seem out of reach affordable since you are putting so much down when you make the purchase.
Pay Attention to the Market
Over the next year as you get ready to buy a home, pay attention to the market in the area in which you want to buy. This can help you understand what homes are selling for and what to expect when you start shopping.
You should also research schools districts and other factors in certain areas. While you may not have children now, you may in the future (especially if you stay in the home for at least five years), so things like school districts and playgrounds might matter more than you initially think.
Set a New Budget
The final thing you can do is to set up a new budget and practice living on it. Work in the additional costs of owning a home like additional utility bills, repair and maintenance costs, and any extra that you would pay for the mortgage. (The extra money can be set aside for your down payment.)
This will give you a good idea of how much you can afford for a monthly mortgage payment and help you be ready when it is time to purchase your home.
Updated by Rachel Morgan Cautero.