You want to buy a house?
Then you MUST get your financial situation in order!
It’s not the fun part, but you’ll need to do it eventually; so the sooner the better!
But what does it mean?
Basically it means you need to take 3 Steps that are all interact and help determine each other:
- figure out what you have for assets and debts
- save money and get credit score in order
- see what you can afford
Lets look at each.
Step1: Figure out what you have for assets and debts
If you are budget minded, you already have a good sense of this.
If not, at a very basic level it means you need to pull together:
- your monthly income – includes all regular salary and/or all irregular income
- your monthly expenses – including anything and everything you pay for (food, clothes, toys, doctor, etc.)
- any savings you may have separate from income and expenses
- total amount of unpaid debt, such as credit card amounts owed, car or college loans
This is all done just to see where you stand today, and to help you understand if it makes sense to start home shopping; or if instead you need to start cutting your expenses, removing more debt and saving first.
Step 2: Save money and get credit score in order
Once you have your numbers from Step 1, if you have no debt and lots of savings, Step 2 is no big deal.
But for most of us, to buy a house will require getting a loan.
This may even mean you need to save and plan for a year or more before you are ready to do anything!
(ugh….)
You will also need to figure out your credit score.
If it is not so great, you want to develop a plan for improving it.
That is because your credit score plays a big role in your ability to secure a loan.
In summary, the amount of loan you can secure will depend on the combination of these items:
- Income – Money that you receive on a regular basis
- Cash reserves – Savings or investment money available to you for initial home buying costs
- Debt and expenses – On-going monthly payments: e.g. credit cards, loans for car payments & student debts, groceries, utilities, insurance, etc.
- Credit profile – Your credit score and your amount of debt
Step 3: See what you can afford
Assuming you are in reasonably decent shape after Steps 1 and 2 …
(meaning you have some income, some savings, and your expenses, debts and credit history are not bad or out of control – so that you can realistically secure a loan if needed)
… then you can start to figure out what you can afford to buy.
There are 2 kinds of costs here you must consider:
– costs of just initially getting the house
– costs of continued ownership and maintenance
For example, here are
- Costs of just initially getting the house:
- Down Payment (if buying with a loan) or Full Purchase Price of house (if paying cash)
- Closing Costs (will be lower with cash purchase than with loan)
- Costs of continued ownership and maintenance (on a monthly or yearly basis)
- Mortgage Payments (only in case of loan)
- Property Taxes
- Homeowners and Hazard Insurance (requirements vary by state)
- Mortgage Insurance (only in case of loan and depending on type of loan)
- HOA, Co-op or Condo Fees (depending on terms of the property ownership)
- Utilities and all the rest (includes expenses of living in your home and keeping it maintained)
In summary – getting your financial situation in order is typically the biggest, hardest part of buying yourself a home.
Questions?
Contact us – we would love to help you understand more!