Wednesday, September 16, 2015

Your 4-Step Financial Checklist to Buying a Home (via GoGirl Finance)

Buying a home is one of the biggest traditional mile markers in American life. Although many millennials are happy to rent, more and more members of Gen Y are finally starting to dip their toes into the waters of home ownership.
If you're thinking about buying a place of your own, it's important that you know your finances are in order before you start browsing listings and hitting up open houses in your town. It's tough enough to manage student loan debtbuild emergency savingsand invest for your future without the added responsibility of a mortgage.
That doesn't mean it can't be done. But it does mean you need to check these financial items off your list before buying a home.
1. Understand Your Cash Flow
Do you know how much money comes into your accounts every month -- and how much goes back out? You need to acutely understand your income and your expenses. This is your cash flow, and it will play a large part in determining whether or not you can handle the financial burden of home ownership.
Before buying, establish good habits around tracking and evaluating your monthly income and expenses. Knowing this information will allow you to accurately determine how much house you can afford on a monthly basis.
In addition to understanding your cash flow, you also need a healthy emergency fund. The general rule says you need three to six months' worth of expenses, but you may want to boost your cash savings ahead of a home purchase. Repairs and maintenance on a home aren't cheap, and when something goes wrong there's no landlord to call to fix the problem.
2. Get Your Debt Under Control
Most mortgages don't come cheap, and for many of us the monthly payment is the largest financial obligation we need to address. That may be a little easier to do if your other debts are cleared off the table first.
Focus on paying off your credit cards and your student loans. (At the very least, you should have a defined repayment plan for your student loans and have no trouble making monthly payments on those.)
You also want to boost your credit score as much as possible before applying for a home loan, and paying off debts will certainly help with that. The better your credit score, the more likely you'll receive a lower interest rate on a mortgage -- and that can save you tens of thousands of dollars in interest over the lifetime of the loan.
3. Be on Track with Retirement Goals
In addition to getting your debt under control, you'll want to ensure you're on the right track with your retirement goals. If you're behind, you may want to take more time to catch up before funneling money into a home purchase.
There are a number of ways you can check to see if your retirement savings are on par with where they should be for your income and your age. Check out Bankrate's retirement calculators, go by rules of thumb like Fidelity's "8x" rule, or evaluate your total net worth to determine where you stand.
Not sure where to save? Employees with 401(k)s should contribute at least enough to secure a match if it's offered. Anyone can contribute to an Individual Retirement Account, or IRA and many young investors choose Roth IRAs because your earnings can grow tax-free. And if you're self-employed? Consider a SEP IRA or Solo 401(k) for your retirement savings.
4. Know All the Associated Costs
One of the biggest mistakes potential homebuyers make is failing to understand the true cost of home ownership. A mortgage calculator can help you figure out your monthly payment based on the principle and interest of your loan -- but it may not take into account things like the cost of homeowner's insurance and property taxes, which can change year to year based on the value of your home.
Do your research and understand not just these expenses, but also the cost of common repairs, necessary maintenance throughout the year and how much it is to make upgrades or replace things like appliances.
There's more to think about on the financial side of things when you're buying a home, but this checklist will help you cover the basics. Being aware of your financial situation and understanding real costs and what you can actually afford will help you stay on budget when you start house hunting.

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