Owning a home can be a blessing, but if you don’t budget properly, you’ll quickly find yourself grasping at straws to financially stay afloat. To prevent this from happening, keep the following tips in mind when checking out the market and budgeting for your new home.
Create a Monthly Budget
You can’t stick to a budget if you haven’t drawn one up. To make that happen, and to make affording a home easier, you need to be honest and accurate about how much you make and spend each month.
After charting your spending versus how much income you bring in each month, evaluate your budget and see if you’re comfortable with where you are at or if you can make some changes in order to reach your financial goals more easily.
This will help you decide how much you can save up for your down payment, and how much you can comfortably put toward monthly home loan or mortgage payments.
[Related: 15 Essential Questions to Ask When Buying a Home]
Build Your Credit Score
Good credit comes before all else when trying to secure a loan. The better your credit, the easier it will be to get a good mortgage rate. Poor credit can do more than give you a high mortgage rate, though — it can completely bar you from procuring a mortgage to begin with.
Credit.com suggests that the minimum credit score for a home loan approval is somewhere around 620, though it varies from lender to lender. Work on improving your credit score by doing things such as paying your bills on time, keeping balances low on your credit cards, paying off past due balances, and avoiding applying for new cards.
[Related: The Difference Between Preapproval and Full Credit Approval]
Automate Your Savings
If you don’t have one already, create a dedicated savings account.
Tell your company’s payroll department that you would like a fixed amount of your income sent to that account every payday via direct deposit, and the balance sent to your checking account. This way, the savings will happen on their own, and you won’t have to stress about moving money around on your own.
So long as you have a good budget established, you won’t even notice that less money is going into your checking account.
Downsize
Saving money now is the best way to have more available tomorrow.
In addition to avoiding splurging, you can move into a smaller apartment before moving. Think about how much space you really need. If you don’t have kids, you could also live with roommates in a larger home, or alone or with your partner in a studio or one-bedroom apartment.
Every month, save money that otherwise would have gone toward rent. These savings will add up quickly as time passes, getting you to the 20 percent golden standard recommended for your down payment.
[Related: Guide to Buying a Home in Seattle]
Practice Making Payments
This doesn’t mean practicing sending your money away. Instead, get a good estimate of how much you will be paying for your mortgage payments, find the difference between that and your current rent, and put that difference into your savings account each month.
For example, if you currently pay $700 a month in rent, and most mortgage options you are considering would increase your monthly payments to $1,200, then put the $500 difference into your savings on a monthly basis.
This way, you will not only have that money saved up for payments, but will also be comfortable putting that much toward housing already when the time comes.
Make a 20 Percent Down Payment
While you can technically pay less than 20 percent for your down payment, you shouldn’t. Reaching this percentage allows you to avoid paying for private mortgage insurance (PMI), and gives you a smaller monthly mortgage payment.
In general, the more you pay upfront, the less you pay overall. Aiming for at least 20 percent, however, is a responsible standard to help keep your budget in check over the long run.
[Related: Guide to Closing Costs in Washington State]
Talk to the IRS
At first glance, they probably seem like the last people you want to talk to. However, owning a home provides you with certain tax breaks, including deductions on your mortgage interest and property taxes.
Itemize those deductions. While this may mean giving up the ability to claim your normal deduction, it allows you to deduct more than just your mortgage expenses.
You can include state income or sales tax, vehicle licensing fees, charitable donations, and more. Individual deductions involve significantly more work, but they’re worth it if you consider the extra cash you’ll have available for your mortgage payments.
Contact Seattle Mortgage Planners
Seattle Mortgage Planners is also available to consult with you about your home-buying journey. Whether you’re a first-time homebuyer who needs assistance applying for home loans, you’re thinking about refinancing, or you’re hoping to sell your current home to look for something bigger for your growing family — our mortgage experts can help. Contact us today for a consultation!
