We’re partnering with M&T Bank to bring you a series of smart money tips that can actually apply to your life and finances. We know that not every piece of money advice is going to apply to everyone, and that’s what we love about M&T Bank. They don’t believe in a one-size-fits-all approach to finances, because everyone’s situation is different. They take the time to understand what’s important to their individual customers so they can help with their specific needs and goals.
A house is not an impulse buy — or at least it shouldn’t be. It’s probably one of the biggest money decisions you’ll ever make (or not make!) in your lifetime. (And yes, it’s totally okay if homeownership is not for you.)
If you have dreams of owning a place that you can paint, reconfigure, and HGTV-experiment with however you like, start thinking of how you can set yourself up for that future financially today. That might seem daunting when you’re still buried in student loan debt and barely making it paycheck to paycheck, but there’s a lot more to buying a home than putting down a down payment. And the process of getting your money in order to make it happen can take time.
So even if you’re not sure what the future holds home-wise, you can still start taking the necessary financial steps, so that all the options are available to you when you ultimately make the decision to buy (or not).
1. Check and track your credit
Checking and tracking your credit will probably come in handy long before you start shopping for a home — like when you’re trying to qualify for a credit card or an apartment to rent. When it comes to homeownership, your credit score is a major factor in determining what your loan terms will be. That is, whether you’ll be approved for a mortgage, and if so, at what rate.
A good credit score makes it more likely that you’ll qualify for a low-interest rate on your mortgage, which can save you tens of thousands of dollars over the life of your loan. By checking and tracking your credit score, you can see where you stand credit-wise, and start working to improve your credit so that when you ‘re ready to apply for a home loan, you can secure the best possible rates.
While you should check your credit reports from each of the three credit bureaus — Experian, Equifax, and TransUnion — at least once a year, it’s especially important to give them a hard look just before you start shopping around for a mortgage to make sure all of the information is accurate. Credit reports often contain errors, like collections that you may have already settled or debts you may have already paid off. These kinds of mistakes can hurt your credit score, so if you see an error, be sure to contact the respective credit bureau and ask for a correction before you move forward with the mortgage process.
Tracking your credit score and keeping regular tabs on your credit reports can help keep you well ahead of potential problems, so that when you’re ready to shop around for a mortgage, you’re not scrambling at the last minute to learn the ins and outs of the credit process.
Pro tip: Visit M&T Money Mentor to learn how your credit score is measured and the impact it can have on your financial goals.
2. Implement a debt payoff plan (if needed).
In addition to considering your credit score when deciding whether or not to approve you for a mortgage, lenders may also look at your debt to income ratio — that is, how much debt you owe compared to your income.
Creditors look at this number to determine how risky it is to lend to you. The higher your ratio, the riskier they consider lending to you to be, and the smaller chance you have of being approved for a home loan at a good rate. By putting in place a debt payoff plan now, you can improve your chances of qualifying for a better mortgage rate in the future.
3. Establish an emergency fund.
If you deplete your entire savings account balance for the sake of becoming a homeowner, it can leave you relying on high interest credit card debt should you run into an unexpected expense or emergency — be it an illness, a job loss or an essential repair on your new home.
Establishing an emergency fund in a separate savings account with at least three to six months worth of living expenses before buying a home is a good way to protect against this possibility. Just remember that the money in your emergency fund isn’t meant to be used for your down payment, moving, or closing costs. It’s your buffer for managing the cost of the unexpected and unplanned.
Additionally, consider your short-term savings needs. If you have any other major expenses coming up, like a wedding or a new baby, you’ll want to factor the savings needed to fund those milestones before you decide how much you can actually afford to spend on your home purchase.
Pro tip: Maybe you’ve heard qualifying for a mortgage always requires a 20% down payment. M&T Bank offers many mortgage options with requirements as low as 3% or no down payment at all to qualifying buyers. If your bank account isn’t bursting at the seams, no worries, as M&T has options for almost any budget. Find out more how M&T Bank can help you prepare for buying a house here.
4. Have an investment strategy in place.
You don’t have to be Warren Buffet before you can buy a house, but it’s important to have an investment strategy that isn’t totally tied up in the value of your home.
Investing in retirement accounts like an employer 401k plan or IRA can bring some more diversity to your long-term financial strategy. While you don’t necessarily have to max out these accounts before buying a home, it’s good to have a long-term savings habit in place, like contributing 5% of your salary to your 401k each pay period, or investing $100 each month in a ROTH IRA.
You can always scale up your contributions as you’re more able (like when you’re done saving up for your down payment), but establishing the habit of long-term savings and investing is a good practice to have in place before committing to a home purchase.
Pro tip: You’ve going places, and M&T is here to help. With investment solutions offered by M&T Securities, you’ll find the products, services and support to help you achieve your personal financial goals.
5. Set a home savings goal.
Speaking of your down payment, before you can figure out how much you need to save up for it, think about how much house you can actually afford. (Keep in mind that, in major cities like New York, you will often have to have at least a 10-20% down payment before being able to buy — but that’s not true of housing markets everywhere.)
Lenders typically suggest your mortgage payment plus taxes and insurance be no more than 28% of your gross monthly income. And that your total household debt — monthly housing payments plus any monthly payments on your student loans, personal loans, car loans, etc. — be no more than 36% of your gross monthly income.
It’s also important to factor in the additional expenses above and beyond your mortgage that come with homeownership. This can include everything from insurance to repairs to property taxes to homeowners association fees. And in addition to added monthly costs, you’ll also need to consider the added upfront costs, like fees on your mortgage loan, your closing costs and the cost of a home inspection.
Once you figure out the monthly mortgage you can afford, you can get a sense of your housing price range, and work from there to calculate how much you’ll need to save up for a down payment plus your added upfront costs. While there are many Federal and first-time homebuyer programs that allow you to put down as little as 3.5 percent of the purchase price on a home, a 20 percent down payment may be a good savings benchmark to work toward as you’re still saving up.
6. Open a dedicated home savings account.
Once you’ve set a savings goal for your home purchase, open up a separate savings account specifically for these funds. If your saving for all of your goals in one account, it can be tempting to withdraw the money you’ve saved specifically for your home down payment for other reasons – like a vacation or a new car.
Having your down payment savings in a dedicated savings account can also help you track your progress more clearly as you work toward your goal, while putting some distance between you and your money, so you’re not tempted to spend it impulsively elsewhere.
Label this new account with your goal — “dream home” or “first house fund” — whatever is going to motivate you throughout the savings process. Take that commitment a step further by setting up a recurring automatic transfer to your home savings each month so that your consistently making progress on your savings goal.
A home is a major commitment, and it’s not one you have to make by the time your 30 or 40 — or ever. But if you start setting your finances up now to someday afford it, chances are, you’ll have the money habits you need to support whatever savings milestone you ultimately choose to pursue.
Pro tip: You can shop for your new home with confidence by getting a pre-approval from M&T Bank. It’s common for lenders to offer a “pre-qualification” based on a simple phone conversation or a quick review of some application questions. M&T takes it a step further by completing a full underwriting review of your application and documentation. If pre-approved, you’ll have the peace of mind and confidence knowing your financing is secure. Having our loan experts work with everyone involved can help fast track your home buying process. Learn more.
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