There’s no place like home for the holidays—and if you’re a would-be buyer, now is the time to prepare your finances to purchase a home in the New Year.
The starting point? An area of concern for many prospective homebuyers: your credit. Research by credit bureau Experian shows those who know their credit status feel significantly more prepared to buy a home than those who don’t. Before you hit the house hunt running in 2016, review (and correct, if necessary), your credit report. If your credit status is less than ideal, take action now to improve it—keep balances low, work toward paying debts off, and resist the temptation to open store credit while holiday shopping.
Once you’ve assessed your credit situation, consult with a real estate professional. It may seem premature, but he or she can point you in the direction of a mortgage professional, who in turn can help determine how much home you can afford, says Dawn Pugliese, broker associate with Prominent Properties Sotheby’s International Realty in Alpine, N.J.
“Get the reference from your REALTOR®,” Pugliese says. “If you’re new to the experience, your REALTOR® can guide you toward the right mortgage people. The pre-approval letter will provide a guideline for your budget.”
That parameter is just one of several factors that must be accounted for when gauging affordability. In general, monthly housing costs should not exceed 35 percent of net income; preparing now with that figure in mind will allow you a few months to track spending, weigh expenses (including new ones incurred as a homeowner), and piece together a realistic understanding of your financial situation.
Doubly important is the down payment, which is easier to save for if you start early. If you’re planning to seek down payment assistance from the bank of Mom and Dad, which, as Zillow recently reported, is increasingly open for business, now’s the time to put it on your wish list.
Closing costs are another consideration, adds Pugliese. “Keep in mind you’ll have to maintain the property, pay for insurance on the home, for title search fees, lawyer fees and more. It adds up.” Saving a few months' worth of mortgage payments is also wise, as well as building a reserve for expenses that are often an afterthought, like moving costs and new furniture.
Though it may seem an immense investment of time and money up front, preparing now financially will pay dividends in your future as a homeowner—in fact, according to realtor.com®, the average buyer today stands to accumulate over $215,000 in wealth over 30 years. “Current market conditions give buyers the opportunity to build substantial wealth in the long-term, compared with renters and later buyers,” explained realtor.com® Chief Economist Jonathan Smoke.