Buying a house is the most costlier purchase you’ll ever make. Thus, you should make sure you can indeed afford it. To do that, you have to get your finances in check. No one buys a house without at least having some knowledge of their financial power. But if you are lacking the finances to go out and buy your dream house, then there are things to do.
That’s exactly what we will talk about in this article.
Are You In A Position To Take Out A Loan?
If you’re like the vast majority of people, you won’t be in a position to pay for your new house in cash. Instead, you will have to take out a mortgage loan. Mortgage loans are great because they have a relatively low interest rate. According to Value Penguin, the average mortgage loan interest rate in the US is around 3,99%.
So you will most likely have to take out a mortgage loan. But are you in a position to do that? Let’s find out.
Find Out How Much Money You Make
The first step is to figure out just how much you make each month. We do this so we know how much money we can allocate towards repaying the mortgage loan each month. The simple way of doing this is to look at your pay stub and the amount after tax. This gives you an accurate picture of your monthly spending power.
Once you do that, you will need to know how much of your salary goes into paying expenses. To easily do that, simply create a budget. A budget helps you figure out what you’re spending your money on. Doing this is necessary as chances are you won’t be able to repay the mortgage loan if 90% of your salary goes into paying expenses.
Eliminate Debt
Being in debt is the biggest reason why you’re not able to afford a house. If you are in debt, the bank will most likely reject you for a loan. While it depends on how much debt you’re in, it’s always better to pay it off before going house hunting.
Even if you are approved for a mortgage loan, buying a house while in debt is a mistake to avoid making. The debt and the sudden increase of expenses can put a strangle on your finances and put you in a very bad situation.
An obvious reason why you should eliminate debt before buying a house is that it improves your credit score. Your credit score is the barometer that tells banks and financial institutions whether or not you can or cannot take out of a mortgage loan.
If your credit score is indeed low, then you will be rejected. One way to improve it is to pay off debt. Before you even think of buying a house, look at your credit score as it is one of the most important factors that determine if you can afford it.
Save Enough For A Deposit
This one is very important as most lenders will require you to put down a deposit when buying a house. While there are varying reports on how much the deposit should be, most agree that it is in the range of 20% of the total home sale.
So if you’re purchasing a house for $200,000, you should have saved $40,000 for a deposit. In recent times, we’re seeing that the actual deposit amount required is far less small than 20%. Some lenders are willing to accept a deposit amount of 15%, 10%, and even 5%. However, this depends on each lender as they have different requirements.
But the bottom line is that you must get your finances in check, enough to put down a deposit.
Cut Back On Expenses
If you’re a first-time homebuyer and the sudden realization of just how expensive buying a house is has hit you like a truck, then your best option is to start cutting back on expenses immediately.
Getting your finances in check means putting yourself in a favorable position to afford the house. If you’re spending 80 to 90% of your salary, then that doesn’t put you in a favorable position. To cut back on expenses, what you can do is go back on the budget.
Look at all the expenses that you’ve added and start thinking of ways to eliminate them. A simple example is to look at all the stuff you’re paying but don’t need. If you have an Amazon Prime subscription and a Netflix subscription, consider cutting one of them. While no doubt this is a relatively small expense, there are tons of other things to do.
The hardest way to cut back is to go through a change of lifestyle. That means no more expensive restaurants, expensive clothes, etc. Learn how to manage your finances as that’s the only way you can afford to buy a house.
