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When to Buy Your First Home - A Financial Plan for Potential Homeowners

Posted by  on Aug 09, 2010
 
If you've been renting for a long time or you just want to buy a new home, you need to realize what a serious decision this is to make. Aside from the obvious large amount of money, buying your first home is a complicated legal process in which you need to make sure you are doing everything right in order to make sure you are the one benefiting at the end of the day. When you want to buy your first home, you need a strong financial plan in place to help keep this major purchase from being a major hassle.

How Much Money Do I Want to Spend?

Even if you haven't starting house shopping yet, you want to begin by figuring out how much you want to spend for a home. This should be a fairly generous number in order to figure out what you need to start saving up or what you will can expect for your mortgage payment. You can begin to come up with this figure by looking in the classified ads to see what other similar homes are being sold for right now. You might also want to look at homes that are slightly larger than you might need in order to buy enough space for a growing family in the future. Always overestimate when it comes to the money you want to spend — that way, if you don't spend that much, you will have extra money to spare.

Steps to Saving Up for a Down Payment

Since most lenders will want you to come up with 20% of the total price of the home for a down payment, you will need to start saving up now. But since you have an idea of what you want to spend, you can approximate the down payment that you will need to have in the bank. Here are some ways to start saving up for that payment today:

  • Have X amount of money transferred to a Roth IRA on a regular basis — Not only does this IRA generate interest, but you can also use it for a new home without any penalties
  • Have money transferred into an interest generating account like a savings account or money market account
  • Start saving early and saving as much as you can spare

Since you will have to save up a considerable amount of money in order to have a down payment, you will want to make sure you are starting to save right now.

Building up Your Credit

To make sure that you are getting the best mortgage possible with the lowest interest rate available, you might want to check out your credit report. If you have a lower credit score, you might not be able to take advantage of the low interest rates and thus better deals on your mortgage. The good news is that getting your credit report rating is simple and it's free once a year when you live in the United States. All you need to do is a quick internet search for a free credit report and you will find a number of qualified sites that can give you not only the score, but also advice on how to raise your score.

Some ideas include:

  • Disputing any errors on our credit report — Make sure that anything that might diminish your credit score is taken off your credit report. You will have to do this in writing with each of the major credit reporting agencies.
  • Paying your bills on time
  • Paying down the credit card balances so they are no more than 50% of the credit limit

Making Sure You Can Handle the Responsibility

The main concern for any first time homebuyer is that they are ready to handle the enormous responsibility of owning a home. And while you can never be absolutely sure that you are ready, there are some questions that you can ask yourself.

  • Am I able to pay my mortgage every month? - If you're not sure, then you're not ready.
  • Will I be overstretching my financial capabilities? — If you find that owning a home is going to cause you to sacrifice too much in the rest of your life, it may not be worth it.
  • Do I have good credit? — If not, you will want to wait until you do.

To check to see if you are ready to buy a home, you will want to act as though you are making the mortgage payments every month by putting that money into a separate account and not touching it. If you find that you're having troubles paying for food and other essentials, you might want to rethink your choice at the moment.

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