Investing in real estate can be wise, but only if your financial situation allows for it. If you find yourself feeling to urge to purchase a home, it is important that you take the time to complete an honest inventory of your current financial situation.
Here are two financial planning precautions that you should take before you attempt to purchase a home.
1. Establish a habit of saving money.
Saving for a home requires discipline. In order to meet the demands of a mortgage, home owner's insurance, and the various repairs that you will be financing as a home owner, you must have access to a savings account. If you struggle to save on a regular basis there are some strategies that you can use to help you establish this habit.
Some effective saving strategies that you might want to try include:
- setting up a separate account for home expenses and having a portion of your paycheck deposited directly into this account
- determining the difference between your current rent amount and a potential house payment and saving the difference each month
- putting any unexpected income (tax returns or cash gifts) directly into your dedicated savings account.
2. Evaluate your debt-to-income ratio.
Taking the time to know, and understand, your debt-to-income ratio is crucial when it comes to purchasing a home. Lenders use this information to determine how much money you are eligible to borrow; if your debt-to-income ratio is too high, you could be denied access to a mortgage. To determine your personal debt-to-income ratio simply add up the money you pay out each month and divide it by your income. If this number is greater than 43%, you need to take action to reduce your debt-to-income ratio.
Here are some effective strategies you can employ:
- increase the amount you pay toward your monthly installment loans to reduce the principle (and subsequent payments) quicker
- avoid taking on new debt in the form of a credit card or installment loan
- postpone the purchase of any large items until after you have completed the purchase of a home
Being fiscally responsible is a must for any future home owner. While attending open houses and fantasizing about your dream home are certainly entertaining, taking the time to ensure that your finances are in order prior to beginning your search for a home is essential. By taking some financial planning precautions before you put in an offer, you will ensure that your experience with buying real estate is a positive one. Also, be sure to work with an understanding real estate agency, such as Century 21 Dynamic Realty, to ensure they respect your budgets and financial needs.