Are you a renter who’d like to buy a home sometime in the next few years?
Join the club. More than three out of four renters would like to own a home, but more than half say they can’t afford it, according to the National Association of Realtors.
The biggest roadblocks are saving up enough money for a down payment and qualifying for a good mortgage with a low interest rate, so you can afford the monthly payments on your home.
3 Steps to Prepare for Homeownership
If you’re planning to buy a home in the next few years, there are a few steps you should take to prepare — and some of them may surprise you.
Making these simple moves can save you tens of thousands of dollars, and might make all the difference when it comes to landing your dream home.
Here are three things to do to get your finances in order before you buy a house:
1. Avoid Other Big Purchases
When you’re getting ready to buy a home, don’t go out and get a new car or nice jewelry, too. The odds are good that you’d be putting those on credit — like a car loan or a credit card.
Then you’d be using a larger percentage of your available credit, and that might lower your credit score. Your “credit utilization rate” — how much of your credit you actually use — accounts for 30% of your score.
Your credit score makes a huge difference when it comes to buying a house. It largely determines the interest rate you’ll pay on your mortgage. And over 30 years of making monthly mortgage payments, all of that interest you’re paying really adds up.
On a relatively average $250,000 mortgage, a 140-point difference in credit scores could save you $83,770 in interest over the life of a 30-year loan, according to a Forbes calculation.
2. Get up to $40/Month Towards Your Down Payment
Saving for your first home is a huge hurdle to overcome. Rising home prices make it tough for homebuyers to save enough money for that crucial down payment.
Digs is the only savings app designed specifically for first-time homebuyers. Every time you save money in the app, Digs contributes matching funds up to $40 per month, based on how much you save. The more you save, the more Digs contributes.
Plus, Digs is offering a $100 bonus when you sign up.
Once you link your checking account to the app, you can set it to automatically save a certain amount per day, week or month. Every month, Digs will match your savings in the following tiers:
- For the first $50 you save each month, you’ll get 20% matching funds, or $10 from Digs.
- For the next $100 you save after that, you’ll get 10% matching funds, bringing you another $10 from Digs.
- For the next $200 you save after that, you’ll get 5% matching funds — another $10 from Digs.
- For the next $1,000 you save after that, you’ll get 1% matching funds — another $10 from Digs, for a total of $40.
3. Make Sure Your Credit Score Is Accurate
Check your credit score before you try to get a mortgage. Credit scores can range from 300 to 850, although most people’s scores tend to fall between 600 and 750. The average score usually hovers somewhere around 695.
You’ll typically get the best rate and terms on a mortgage if you have what’s considered “good” credit — a score of 760 or higher.
Here’s the catch, though: Did you know your credit score could be inaccurate? One out of five credit reports has an error, according to a study by the Federal Trade Commission.
To keep a closer eye on your credit, get your credit score and a “credit report card” for free from Credit Sesame. It breaks down exactly what’s on your credit report in layman’s terms, how it affects your score and how to address it.
Because it simplifies everything, you should be able to spot any errors. For instance, if you find an “unpaid” credit card that you know you paid, or a bill in collections you know never existed, you can dispute the incorrect information and raise your credit score.
About 60% of Credit Sesame members see an increase in their credit score; 50% see at least a 10-point increase, and 20% see at least a 50-point increase after 180 days.
Note: Credit Sesame does not guarantee any of these results, and some may even see a decrease in their credit score. Any score improvement is the result of many factors, including paying bills on time, keeping credit balances low, avoiding unnecessary inquiries, appropriate financial planning and developing better credit habits.
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He’s planning to sell his current house and buy a different one.