By Debbie Drummond
Now is a good time for potential new homeowners to review, revise and refresh their financial habits.
While getting serious about finances is a great idea for anyone, it is especially helpful when the purchase of a home is planned for the coming year. Adopting the following resolutions helps keep these financial goals squarely within a potential homeowner's sites while providing the ability to track their progress as the time to purchase a home approaches.
1. Make a Realistic Budget
The word "budget" often has a negative connotation to it. Some people find themselves chafing at the thought of the restrictions imposed by making a budget. However, this valuable financial planning tool doesn't have to be that way. One of the great things about a budget is that it enables an individual to more effectively channel their money while also giving them the flexibility they crave.
When creating, or updating, a budget, be sure to allow for the increased costs that home ownership is likely to bring. Some examples that renters might not have had to contend with before include property taxes, home maintenance costs and homeowners association fees.
Even if your home purchase is six months to a year away, planning a budget now is a good idea. You can put the money you would be paying for taxes, HOA fees, etc., into a separate account to save for the down payment.
2. Live That Budget
A budget is only good as a financial tool when it is put into practice. This is especially true when the additional costs of homeownership are figured in. It is important for potential homeowners to start living within their budget as soon as possible to get an idea of how their new life will operate.
By following their new, house-friendly budget, it's possible to determine if any areas need to be adjusted before taking on the added expense of a new home. If there is any money left over, you may decide to put it away in a saving account that is earmarked for new home expenses.
3. Add to a Home Buying account
Hopefully, a home buying fund has already been started and added to in anticipation of finding that perfect home. Now is the time to really fine-tune that budget and squeeze every extra dollar out of it. Adding to a home buying account now can open up additional avenues once potential homeowners are ready to actively look for a home.
For example, aiming to save up the standard 20 percent down means that the costs of private mortgage insurance can be avoided in most cases. Other costs that can be covered under this account include closing costs, home inspections and appraisal fees.
4. Designate an Emergency Fund
Emergencies may crop up whether someone is a homeowner or not. Establishing an emergency fund is an important component of good financial health that is especially important as a person preparing to buy a home.
Doing so helps avoid the temptation of dipping into the home buying account if a car suddenly needs to be replaced or if a pet needs expensive surgery. Once the move into a new home is complete, it's important to keep that emergency account fully funded -- with a few months of living expenses -- in the event that unexpected repairs are needed soon after the official move-in date.
5. Pay Down Debt
Shedding debt before becoming a homeowner may put you on more stable ground when it comes to applying and qualifying for a mortgage. In addition, doing so provides more financial leeway when it comes to shouldering moving expenses or furnishing a new home. It's best to focus on paying down high-interest debt first. For most people, this is going to be credit card debt. Many decide to pay debts in the order of highest to lowest interest rates.
6. Focus on Your Credit History
Homeowners-to-be often try to do everything possible to improve their credit before they apply for a mortgage. Credit history and income are two major factors that are considered by lenders when it comes to approving mortgages. Paying off debts can result in small, upward changes in a credit score. These positive changes may translate into better terms that can mean significant savings over the lifetime of the mortgage.
It's also important to avoid applying for unnecessary credit as the date for purchasing a home approaches. Lenders that see new lines of credit opened too close to that date may become concerned about the applicant's financial health.
7. Consider Learning About Basic Home Maintenance
Like everything else, a home requires basic maintenance in order to remain healthy and structurally sound. Even homeowners who aren't handy can often change a washer in the faucet to stop a drip or add downspouts to their existing guttering system to divert water away from the foundation.
For homeowners who want to learn about basic home maintenance, now is the time to attend workshops at local home improvement stores, read books and watch home improvement tutorials. Doing so could save thousands in maintenance costs of the lifetime of being a homeowner. Some home maintenance jobs are best left to the professionals, though, so start gathering the names of reputable and experienced service companies now so they're handy when the time comes.