Home values continue to rise across the country, which is excellent news for homeowners and real estate investors. However, an unfortunate by-product of increasing home values is a subsequent increase in rent. If you’re currently renting an apartment or home, now may be the ideal time to break free from the rent cycle and invest in a house.
Homeownership offers many benefits not found when renting, including appreciating values in your home and the ability to build equity. This equity can be used later down the road in case of financial emergencies, as funds to upgrade your home, or to even pay for higher education.
However, before you jump straight into looking at new homes, there are steps you can take to make the financial transition as easy as possible.
Preparing for Homeownership
Here are ten steps to help you transition from renter to homeowner:
1. Obtain a copy of your credit report.Buying a home is likely the most significant financial investment you’ll ever make. You want your credit score to be as high as possible to ensure you receive the lowest interest rates possible and make getting approved a breeze. Start by obtaining a free copy of your credit report from each of the three major credit bureaus at AnnualCreditReport.com. Look for any errors that can be addressed to quickly boost your score.
Tip: With our Advantage Checking, you can get your credit score monthly, and request a FREE credit report every 90 days or upon receipt of a credit alert.
2. Pay down unsecured debt.
Keeping your unsecured debt low is crucial when applying for a mortgage because it directly impacts your debt-to-income ratio, a key factor lenders evaluate to determine your ability to repay the loan. A high debt ratio suggests you may struggle to manage additional debt, potentially leading to higher interest rates or even loan denial. Additionally, a lower unsecured debt improves your credit score, demonstrating financial responsibility and increasing your chances of a more favorable rate.
Buying a home is a significant financial investment with upfront costs and ongoing maintenance. Before you seriously start looking at homes, you want to build your savings. Spend time going through your account statements and monthly budget to look for areas you can cut back or eliminate.
4. Increase your income.Sometimes you can only cut your living expenses so much. Another alternative to help with upfront home costs is to boost your income. Consider picking up extra hours at work, putting your skills to work through freelance projects, or taking on a side hustle to bring in additional funds.
As a homeowner, you’re guaranteed to experience the challenge of unexpected home repairs at some point. Prepare yourself and your finances by creating an emergency fund. Try to put aside three to six months of living expenses into a separate savings account and only access these funds in an emergency.
6. Open a separate savings account for mortgage expenses.When you purchase your new home, there will be many upfront costs, including closing costs and a down payment. To avoid the temptation of dipping into these funds for frivolous spending, it’s wise to open a separate savings account to house this money.
7. Make a budget.Homeownership comes with several monthly expenses you typically will not encounter as a renter. While property taxes and homeowners’ insurance will usually be escrowed into your monthly payment, costs such as lawn maintenance, utilities, and pest control will be your responsibility. Sit down with friends or family members that own homes and review how much they spend monthly on home-related costs. Factor these estimates into your current monthly budget to make sure you can afford them.
8. Automate your savings.When saving for your down payment or closing costs, automating the process can help ensure you save a portion of each paycheck. An ideal way to complete this is through Payroll Deduction with the credit union. This service automatically transfers a portion of your paychecks to a savings account each time you get paid.
9. Save your bonuses & tax refunds.Windfalls are a great way to boost your savings significantly without much extra work. While bonuses and tax refunds might only come around once a year, they can be hefty! As exciting as it is to earn a chunk of change, challenge yourself to put the majority of that extra money right into your savings account.
10. Speak to professionals.Even if you aren’t ready to buy yet, stop by the credit union and speak with our home loan team. You’ll gain insight into the various mortgage programs available as well as programs with possible lower down payment requirements. Armed with this information, you’ll have a better idea of how much you need to save for upfront costs, as well as the type of mortgage that will work best for you.
We’re Here to Help!
Homeownership provides many benefits that renting cannot. While the initial costs of homeownership may be higher than what you’re paying renting, the long-term financial benefits far exceed those of renting.
If you’re ready to start exploring home loan options or would like to receive more information on the home-buying process, we’re ready to help. Please stop by any of our convenient branch locations or call (409) 726-2126 to schedule an appointment today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
