4 Steps to Get Your Finances in Order Before Buying a Home

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Post from MilitaryByOwner

So, you're not quite ready to buy a home yet, but think that you might be someday? It's never too early for military families to start financially preparing for homeownership. But you don't have to spend your entire life prepping and saving, especially when you find the right loan. There are some ways to get your finances in order before you buy -- no matter how long you've been an aspiring homeowner, and whether you plan to buy in five years or five months.

Here are four steps to get your finances in order before buying a home:

1. Get control of your credit score.

While you can have less than perfect credit and still get a loan to buy property, your credit score influences how easy the process is and what kind of rate you'll qualify for. For optimal ease and lower interest rates, it's best to get that score in the green. Strive to get your score up to 620 to 740, depending on what type of loan you want.

How you can repair a less-than-perfect credit score:

  • Dispute errors on your credit report. There's no need for your credit score to take a hit due to a mistake if you find a discrepancy in your credit report after giving it a thorough look! There are ways to get it removed. Not sure how to do this? Thankfully, the FTC provides a simple two-step process to make it as painless as possible for you.
  • Reduce credit card debt. Pay off as much debt as you can. Then, take it a step further and carry less than your credit limit. Think 25-30% of your credit limit, as this will help you improve your credit score the most.
  • Create a positive credit history. Without closing all of your current credit cards, as this can negatively affect your credit score, choose a new credit line to use and stick to that. Look for one that offers great rewards or benefits and use that one card for your purchases, being mindful to pay the balance off monthly.
  • Pay bills by the due date. Late payments hugely affect your credit score. If you don't have your accounts set up for automatic payment, consider setting an alarm to make sure that you get the payment in on time -- keeping in mind how long it can take to process.

2. Set aside money for a "homeownership account."

The cost of owning a home is much more complex than paying off a mortgage. Homes can be expensive to maintain. Even if you buy a brand new home, things will break over time, and events outside your control, like natural disasters, can occur and require financial love. Items to budget for include:

  • Utilities. Water, electricity, gas, internet, etc., can be expensive depending on where you live and how the house was built. If you're buying in an area new to you, this is an important factor to research ahead of time.
  • Maintenance. It takes a chunk of money to keep a house running. Appliances break and need to be replaced, roofs need to be repaired, pests need to be addressed, HVAC systems need to be serviced, plumbing needs to be cleared out -- you get the idea. While none of these things amount to a hefty bill alone, together, they can take a toll on your account.
  • Changes/updates. Can't wait to renovate the kitchen? Whether you plan to do it over time or all at once, making changes to your home can get expensive.
  • Landscape. Have you looked at the cost of landscaping? Even if you're willing to get your hands dirty and do it yourself, giving that flower bed some life can cost a pretty penny!
  • HOA fees. While some HOA fees are a mere $500 a year, in places like Southern California, you'll find rates at $300 or more a month. Depending on where you're located, these fees can be a necessary part of your budget.
  • Emergency fund. The sad truth is that things will go wrong, but since we know it will happen, you can cushion the blow by having a fund just for this. Be prepared for unexpected circumstances, like a tornado sweeping through, a failed HVAC system, or a flooded basement. .

3. Calculate how much house you can afford.

To be clear, the preapproval amount provided by the lender does not determine how much house you can afford unless you want to potentially end up house poor. In addition to your mortgage rate, you need to understand the full cost of living in an x-dollar amount home.

Things to consider:

  • The 1% rule. As military families, we know that we're not going to live in a house we buy for the rest of our lives. Instead, we'll have a choice to make, either sell it or turn it into a rental investment property. If you're looking to grow your investment and rent it out when you PCS, you can know if a particular home is a good investment for this by following the 1% rule. The 1% rule says that if a property can be rented for at least 1% of its purchase price per month, it's a good buy.
  • Your down payment. Depending on what type of loan you choose, you could wind up needing to put down 10% of the purchase price. For an FHA loan that amount drops a bit, but again, this is determined by the loan you choose.
  • Closing costs. Closing costs can run on average anywhere from 2 to 5% of the purchase price. The percentage doesn't sound like a lot, but that means you could be tacking on an additional $14,000 to close on your $350,000 home. Closing costs are certainly not pocket change and need to be considered when determining how much house you can afford.
  • Your other investments. If you have other investments, you shouldn't buy a home so expensive that you sacrifice your other financial interests like retirement, savings, and college funds.

4. Find a loan that meets your financial needs.

Loans are not one size fits all! Have you researched loans before? There are a handful to choose from, each offering its own benefits and downfalls.

  • VA loan. The VA loan offers competitive interest rates for military families and no money down. However, it's best used for those purchasing a primary residence.

    Related: VA Loans 101

  • Conventional. Not backed by the government, conventional home loans most often require a higher credit score to qualify, but can be a good option if you don't meet the eligibility requirements for other loans.
  • FHA loan. The Federal Housing Association is part of HUD and helps qualifying home buyers get a great deal when it comes to buying a home, especially first-time homebuyers.
  • USDA loan. A USDA loan can be a great option if you're looking to buy a home or land in a rural area. The loan is designed to help lower income applicants who are unable to qualify for traditional financing.

Getting your finances in order might seem tedious and downright slow. There's no denying that the process can take a lot of work and a lot of patience. But if you plan right, the work will certainly pay off in the future when you're ready to make that beautiful home yours.

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