Buying a home is as much about your state of mind as the state of your bank account—but both need to be in great condition. Here are a few habits to adopt to get yourself ready to become a successful homebuyer.
The first habit is to know your credit score. Before you apply for a home loan you should have at least a credit score of 600+ (700+ is even better). The easiest way to work on your credit score is to pay your bills on time, every time. Payment history makes up about 35% of your credit rating. A single late payment can have a drastic effect on your score. Additionally, you should keep your credit card balances low and if you have any collection accounts on your report, you may try calling the collection agency and negotiate a "pay for delete". This is where you agree to pay the balance on the account and the agency agrees to remove the account from your credit report. Every step you take to eliminate your debt will help you in the long run!
While you are working on your credit score, saving up the down payment is key to buying a home. Ideally, you'll want to save 20% of the cost of the home. 20% down payments will earn you a better interest rate, lower upfront fees, lower ongoing fees, more equity in your home right from the start, and will earn you a lower monthly payment. It's tempting to go with the lowest all-in upfront charges when trying to buy a home but the key to building net worth is to buy smart. By ditching an indulgence (or two) you can start saving towards that down payment.
Additionally, it's helpful to set up an automated savings account just for your down payment. You can allocate a certain percentage or dollar amount of your regular pay to go directly into a savings account or money market account, making the process automatic and invisible to you. This will remove both the temptation and ability to spend the money on other purposes.
Your credit score is increasing, you have saved up for your down payment, and you are close to beginning the home search but you are still nervous to take the plunge. What next? It may be a good idea to do a trial run at ownership. Sit down and run some estimates for a mortgage and maintenance costs and set aside the anticipated amount of expenses each month and see how comfortably you can get by. This will ease any kind of worry you may have and will also allow you to narrow down your home search on what you can actually afford. Think of it as a dry run to prepare both your finances and your psyche for the extra expenses that homeownership brings.