What is the most challenging task related to buying a house?
Most homeowners mention saving for the down payment. Finding the right property is another challenge. Qualifying for a mortgage, working with a realtor, and paying for home maintenance comes at the top of the list. In this article, we’re going to cover the first challenge, i.e., saving enough to cover the down payment and the initial expenses of buying a house.
If you talk about a conventional mortgage, you need to save 20% of the sales price for the down payment and 2%-3% for closing costs. Let’s suppose the median value of homes in your area is $250,000. In that case, you need to save up $50,000 for the down payment and $10,000-$1,5000 for additional expenses.
If you’re buying your first home, you can qualify for a mortgage with a minimum down payment (3.5%). Still, then you might have to pay more interest rates, and the private mortgage insurance is automatically applied to your installment. It is best to pay down 20%. If you can’t do that, aim for 10% so that you can secure the best interest rate.
So, how do you save enough for your home to make a purchase in the next 1-5 years? It is great if you give yourself 5+ years to save for the house. However, one year is fine if you don’t bear the burden of other debts.
Focus on Paying High-Interest Debts
How much do you owe to the credit card company? Carrying a few hundred dollars debt is okay, but make sure to pay it at the earliest. Credit card debts carry double-digit interest rates, and it’s no surprise to see the debts piling up swiftly.
Do you have other loans? What about student loans? Any additional mortgage or vehicle loans?
Before saving for your next property, make sure to settle your current debts. It does two things:
- Your debt-to-income ratio decreases, thus increasing your chances of qualifying for a mortgage.
- You free up more income to pay more for your home.
Buying a house is a dream you should pursue, but debt never leads to true financial freedom. Do not sign up for a mortgage yet, if more than 10% of your income is going towards debt payment.
A Strategic Focus on Increasing Your Income
All of us want to expand our income sources, but fewer of us make a conscious effort to increase our income. Besides your day job, think about other ways to generate a profit. Don’t underestimate the power of additional funds. Even an extra $50, $100, or $500 can do a lot for your home. At first, it may sound not very easy, but spend a few days thinking about it. A part-time job or a side project can bring additional income, which goes straight to your bank account for your home.
Improve Your Credit Score
Credit score savings go unnoticed, but by improving your credit score, you can save thousands of dollars in the long run. You can check the FICO score website, enter your current rating, and mortgage values, and you can see the potential savings. Increasing your score is not too much difficult, but it takes some effort and time. Review your score earlier so you can dispute any false information and get it corrected before time.