Obviously buying a home, whether it's your first home or a step up from your current house or condo, will have a major financial impact on your life. There are steps that can be taken to maintain control of the situation, reduce needless stress and get your finances in order.
1. Develop a family budget: Instead of budgeting what you’d like to spend, use receipts to create a budget for what you've actually spent over the last two or three months. Keep track of everything, right down to every cup of coffee, etc. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent and car payments. You might also find great opportunities to reduce your expenses.
2. Reduce your debt: Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt, such as car loans, student loans, revolving balances on credit cards, down to between 8 percent and 10 percent of your total income. Although, some lenders will make exceptions for first-time home buyers, those exceptions usually come with a price.
3. Increase your income: It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want. This is not exactly something anyone looks forward to, but it may be necessary for a while to reach your goal of homeownership. It may also help you save the money you'll need.
4. Save for a downpayment: Although it’s possible to get a mortgage with only 5 percent down, or even no money down in many cases, you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving as much as possible.
5. Create a house fund: Don’t just plan on saving whatever’s left toward a downpayment. A more effective strategy is to decide on a certain amount a month you want to save, then put it away as you pay your monthly bills. You'll reach your goal faster with this approach.
6. Keep your job: While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you'll have to pay a higher interest rate or won't qualify for certain loan programs.
7. Establish a good credit history: If you don't already have one, get a credit card and make payments by the due date every month. Do the same for all your other bills. Pay off the entire balance promptly. Also, check your credit report for any errors, and get those errors corrected. The sooner you check your credit report the better because errors can take a couple of months to be removed. It most likely will take even longer for your credit score to improve.
This isn't intended to be an exhaustive list of steps to improve your financial preparedness to purchase a home, but taking these steps will get you on your way.