As a new year begins, it’s time to focus on your financial goals. If you’re planning to buy a home in 2023, there are several important tasks you’ll need to complete before filling out that mortgage loan application.
These include: 1. Getting your credit score in order. 2. Obtaining pre approval for a mortgage. 3. Budgeting. 4. Creating an emergency savings fund.
1. Get Your Credit Score in Order
Before you submit your mortgage loan application, it’s smart to order a copy of your credit report. Review it to see how your credit score has been trending and to make sure you’re ready to buy a home. Pay down credit card debt to increase your buying power, or consider consolidating revolving accounts for a lower interest rate.
A high credit score helps you qualify for a better mortgage, and a low one can prevent you from getting the loan you need. A good starting point is to keep your debt-to-income ratio below 30%.
Then create a budget that fully covers your new expenses as a homeowner. This includes your mortgage payment, utilities, homeowner’s association or condo fees, and maintenance and repairs. This will help you avoid being “house poor” and ensure your home is a sound investment.
2. Get Prequalified for a Mortgage
The mortgage preapproval process takes into account your credit, debt and income. It gives you an idea of how much you can afford to spend on a home and helps you narrow down your search.
However, a preapproval letter doesn’t necessarily mean you have to borrow up to that maximum amount. You should still set a budget and find out what factors limit your home price range, such as if you work on commission or have frequent gaps in employment.
Creating a savings plan is one of the best ways to improve your financial situation and prepare for a down payment. There are many budgeting apps and online tools that can help you set goals and track your progress. It’s also a good idea to get life and disability insurance.
3. Start Saving for a Down Payment
Whether you want to purchase a home in a year or 10, it’s never too early to start saving for your down payment. Consider opening a savings account specifically for down payments, and make sure to track your progress on a monthly basis.
You can also request that friends and family skip physical gifts at holidays and other special events, and instead give you money toward your down payment (if it’s allowed under the rules of your mortgage loan type). You can even crowdsource
your down payment through various apps and websites.
You can also reduce your expenses by cutting out bad habits, such as shopping online and in stores. By cutting costs, you can accelerate your home-buying timeline by years. You can then put the extra funds into your down-payment savings account.
4. Make DIY Your New Hobby
Buying a home is a major financial undertaking and a big life milestone. It can also be one of the most expensive things you’ll ever do, especially if mortgage loans and other costs are factored in.
Boosting your savings can help you get ahead of expenses like down payments, closing costs and more. You’ll also need to budget for the ongoing costs of homeownership, including maintenance and repairs.
Setting up a monthly savings plan and adjusting it as needed can help you stay on track to reach your goals. You can even use a free app, such as Simplifi, to automate your savings and track your spending. You’ll be able to see what you’re saving and how much you’re spending on the perks of homeownership.
5. Create a Budget
Once you have a better understanding of where your money goes, create a budget to help align your needs with your financial goals. Set short-term goals that take no more than a year to achieve and longer-term goals such as saving for a down payment or investing in retirement funds. Something important like a home warranty cost is a very real part of saving and budgeting when buying a new home.
Start by tracking your spending for a few months, using an app that can link to your bank account or by manually tracking expenses with receipts and bills. Then, estimate your fixed expenses that remain the same each month — rent or mortgage, auto and home insurance. Next, identify your variable expenses such as food, shopping and utilities that may vary from one month to the next.