A quick guide to preparing yourself financially to buy a house

Preparing to buy a house involves more than just saving money for a down payment. It requires careful financial planning and preparation to ensure a smooth and successful purchase. From managing your credit score to setting a budget and understanding mortgage options, this guide will walk you through essential steps to get financially ready for buying a home. By following these strategies, you can navigate the complexities of real estate transactions with confidence and make informed decisions that align with your long-term financial goals.

See also: Buying vs building a house: Which is the wiser choice?

Check your credit score

• Your credit score matters when you want to buy a house. A higher score, usually above 670, means you can get better loans with lower interest rates.
• You can check your credit score for free online. It tells you how trustworthy you are with money and how likely you are to pay back loans.
• To improve your credit score, make sure you pay your bills on time every month. This shows lenders that you’re responsible with money.
• Keep your credit card balances low. High balances compared to your credit limit can lower your score. Try to use less than 30% of your credit limit.
• Building a good credit score takes time. Start early and be patient. The better your score, the easier it will be to qualify for a mortgage and save money on interest payments.

Source: Pinterest

Check your affordability to buy

• Determine how much money you make each month first. Next, tally the total amount of money you spend each month on rent, groceries, and loan repayment. These are the costs you incur.
• Next, look at how much money you’ve saved up. This includes any savings you have for a down payment on a house, as well as money set aside for unexpected costs.
• You can determine how much you can afford to spend on a home once you are aware of your income, expenses, and savings. It’s a good idea to keep your housing expenses to no more than 30% of your monthly income. This covers items such as your house insurance, property taxes, and monthly loan payments (EMI).

Budget and save for a down payment

Although a 20% down payment is usually preferred, there are programmes available for smaller down payments as well. To determine how much house you can afford comfortably, create a budget. Take into account prospective maintenance expenses, homeowners insurance, and monthly bills.

Find out hidden cost

Hidden costs when buying a house can include expenses like property taxes, home insurance, closing costs (legal fees, registration charges), maintenance fees for amenities (if applicable), and potential repair costs for any issues discovered after purchase. It’s important to budget beyond the purchase price to avoid unexpected financial strain.

Source: Pinterest

Check your eligibility for a pre-approved home loan

• When you find a home you like, check if you qualify for a pre-approved home loan. This means the bank has already looked at your finances and is willing to lend you a certain amount.
• Being a salaried worker or having a good history with a bank might make you eligible for this. It helps you know your borrowing limit and monthly payments upfront.
• Getting pre-approved can make buying a home easier. It gives you a clear idea of your financial boundaries and speeds up the buying process.

Consider private mortgage insurance (PMI)

• Private mortgage insurance (PMI) may be required if your down payment is less than 20% of the purchase price of the house. This is an additional expense that is added to your mortgage each month.
• PMI protects the lender in case you can’t make your mortgage payments. It’s usually required until you’ve paid off enough of the loan or your home’s value has increased enough to reach 20% equity.
• Remember to include PMI in your calculations when figuring out how much you can afford each month for your housing expenses. It’s important to know this cost upfront.

Talk to a financial advisor

A personalised plan designed by a financial advisor can assist you in realising your dream of becoming a homeowner. After assessing your financial status, they will recommend the best loan options for you. They can help you every step of the way when purchasing a house. This covers every step, from selecting the appropriate loan to approving the last set of documents. Having a financial advisor can reduce the stress and ease the process of purchasing a home. Along the way, they’ll make sure you’re managing your money wisely.

Address your debt

High debt-to-income ratio (DTI) can hinder your loan approval. Focus on paying off high-interest debts first, and avoid taking on new debt before buying a house.

Important questions to ask yourself before taking decision

Am I ready for the commitment?

Homeownership is a long-term commitment. Consider if your lifestyle aligns with staying put for a few years.

How long do I plan to stay?

If you foresee job changes or relocations in the near future, renting might be a better option.

What are my needs and wants in a home?

Make a list of your must-haves and nice-to-haves in terms of size, location, features (yard, garage etc.).

Is this the right neighbourhood for me?

Research the area’s safety, schools (if applicable), commute times, amenities, and overall vibe.

How’s the housing market?

Is it a buyer’s or seller’s market? Are home values stable or fluctuating?

Can I truly afford the ongoing costs?

Factor in property taxes, homeowner’s insurance, potential HOA fees, and maintenance costs on top of your mortgage payment.

FAQs