Preparing Yourself for Home Ownership

Do you want to buy a new home while avoiding the missteps and mistakes that overwhelmed many buyers the past few years? Buying a home now, especially with today’s low mortgage rates, can be an excellent investment, but you need to be financially prepared for the responsibility of home ownership.

Establish a budget and live by it. You need to track your earnings and expenses to know where your money is going and determine how much house you can afford. Expenses consist of utilities, car loan, credit card debt, and housing expenditures as well as miscellaneous spending which includes entertainment, dining out, and even that cup of coffee you routinely stop and purchase on your way to work. A good way to track spending is to open a checking account and use online banking to obtain spending feedback and establish a reasonable and retainable budget.

Get control your debt. You don’t want to buy a home if you have uncontrolled debt. Excessive debt, limits available cash for mortgage payments and the unexpected expenses a home owner can experience. Also, the less debt you have, the better your debt-to-income ratio, which is one criterion lenders use in approving your loan. According to the Federal Housing Administration (FHA), your debt expenses, including your mortgage payment, should not exceed 43% of your income.

Shape up your credit report. Even though you don’t have to have perfect credit to qualify for a home mortgage, a better credit report can qualify you for a more favorable loan with lower interest, potentially saving thousands of dollars over the life of the loan.

Create an emergency savings account. As a home owner, an emergency repair on your home or an appliance is never a matter of if, but when. Even as a renter you should have an emergency fund. You never know when your car will break down or you will need cash to cover an unexpected situation. With an emergency fund you are prepared for the unexpected and won’t need to rely on a credit card with its high interest rate to pay for the emergency. A handy way to start an emergency fund is to open a savings account at your bank, make regular deposits, and don’t touch it unless it’s an emergency!

Save up for a large down payment. A traditional mortgage requires a 20% down payment. Though some programs allow a smaller down payment, the more money you put down on you home, the smaller your mortgage payments will be. Have you heard of someone having an “upside down” mortgage? That means they owe more on their home than what it’s worth. This is a situation you never want to be in. Having a large down payment will immediately provide you more equity in your home and help protect you from suffering an upside down mortgage. Should your home lose value as a result of a market downturn, a large down payment provides a safety net to absorb a possible loss should you need to sell your home.

Be prepared to stay in the same place for a long time. One of the advantages of being a renter is that you have quicker mobility to move if needed compared to a homeowner. That mobility comes at a cost as your monthly rent creates zero equity and pays absolutely no financial return to you. If you buy a home, be prepared to stay in that home for at least three to five years. The longer you stay in your home the greater the equity you will create which will put you in a much more favorable financial situation should you decide to move.

Home ownership is part of the American dream. However, if you buy a home before you’re ready financially, that dream can quickly become a nightmare. With a little patience, homework and financial diligence, you can make that dream into a reality.

Sterling State Bank in Minnesota provides home mortgages, business banking, loans, insurance packages, and investment options to meet all your financial needs.

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