How to Financially Prepare to Buy a House

This post may contain affiliate links. Please refer to my Disclosure for more information.

How to Financially Prepare to Buy a House

 

First, make sure you know how much extra you can put down on it a year and what the rules are around that. You don’t want to put extra down and find out that you now have to pay a penalty.

Brainstorm What the Next 2-10 Years Could Look Like for You

I know this isn’t the “sexiest” thing to do, but it is so important to do this to make sure you are not just basing your decision on where you are now, but also taking into account the life changes that will more than likely be coming up in the pipeline or what will be coming up.

Think of Life Changes Such As:

  • Marriage
  • Your health, your partner’s health (if you have a partner)
  • Job changes, the likelihood of you being able to get another job in the same area that you want to purchase a home in
  • The stability of your job
  • Changes in the economy or your industry and potentially taking a pay cut, fewer benefits, etc.
  • Variability in monthly income (if you have months of higher income, lower income, if you are off during the summer or winter, etc)
  • Potential job relocations
  • Starting a family, going down to one income, or receiving 50-70% of your income while on maternity/paternity leave
  • Childcare when you go back to work
  • When you would want to have another child
  • Increased costs of childcare
  • Increased costs of children
  • Potentially aging parents who may need the time or financial care
  • If you or your partner are thinking about potentially pursuing entrepreneurship and will have an irregular and unsteady income for quite a while
  • If you decide on a variable interest rate, interest rates potentially going up (and therefore increasing your monthly payments)

 

Realistically Figure Out What You Can Afford

Take your monthly take-home pay (after you’ve paid taxes) and figure out what is 33% of your income. As a financial coach, I see a lot of people who are living in homes that they truly can’t afford and they are now feeling the stress of having their fixed expenses so high and not a lot of “breathing” room to get ahead. The reason I say to figure out what 33% of your monthly take-home pay is, is because that is the highest that you would want your TOTAL monthly housing expenses to be. If it goes above the 33% mark, you will really notice that you are having a hard time with other bills, because your housing costs are such a large percentage of your income.

If you can keep it towards the 25-30% mark that is better, obviously the lower, the better.

When you are figuring this number out, I am not just referring to your monthly mortgage amount, you will also want to include within this is:

  • Monthly mortgage amount
  • Mortgage insurance (if applicable)
  • Utilities
  • Property Taxes
  • Home Insurance
  • Repairs, Maintenance
  • Landscaping, Basement, Renos, Updates
  • Closing costs (lawyer fees, realtor fees, home inspection – you will want to get a home inspection even if the home is new)

If you are just using the monthly mortgage amount, it could be $1200 as an example but after you calculate in these other costs it could easily be $1750+, which is a big difference to use for your calculations.

One of my biggest concerns I see when people are wanting to purchase a home is not having a truly clear picture of your finances, before looking for a home. When you are working with a realtor, a builder or other home professionals, they are only able to help you out as much as you can clearly articulate your financial situation to them. If you aren’t entirely clear on your financial situation, don’t expect those who are trying to help you to be either!

They don’t see all of the things happening behind the scenes, they don’t know exactly what your expenses are, so you need to know this so they can properly help you find a home that is right for you, not just now, but in the future. But they can’t guess, so you need to do your own due diligence ahead of time, so they are able to help guide you into what is truly best for you.

Figure Out Roughly What You Need for a Down Payment

If you are considering looking at a home that is around $150,000 and you want to put down 15%, your goal will be to save $22,500 for a down payment.

Sit down and actually play around with the numbers to see what you will potentially be looking at as needing to have saved for a down payment.

Open Up a Separate Savings Account to Put Your Savings into for Your Home Down Payment

Most people have one savings account but they are trying to save for multiple things in that one savings account, which makes it really difficult to have transparency to know how much you have saved towards all of your goals. This is just one reason why I highly suggest opening up a separate savings account that is just for saving for a house, some banks even allow you to “name” the account, which I also suggest doing!

Make Mastering Your Cash Flow an Utmost Priority

This is definitely one of the most important things to do before committing to putting extra towards your mortgage. When you have clarity with your money and you become really competent at mastering your cash flow (not just “budgeting”), you truly know how much extra you can put towards your mortgage without causing you to come up short in other areas. It will also help you to see your months that you may have higher income available to put towards your mortgage, so you can allocate it for it before it comes and all of a sudden is put towards something else. Feeling confident with cashflow management and taking control of your finances months in advance, is one of the skills that I help my financial coaching clients to achieve.

By making mastering cash flow a priority, one of my clients “D” (to protect her identity), we were able to make sure that all of their goals were being achieved including paying into hers and her husbands retirement funds AND we were able to make it so they could put $50,000 additionally towards paying off their mortgage each year for the remaining term.

Figure Out When You Would Potentially Like to Purchase

Once you have figured out approximately what you need to save as a down payment, then figure out when you would potentially like to purchase.

If it is 2 years from now, that is 24 months that you have to save up. Which you can then figure out how much a monthly, you need to start saving right away.

If you want to save $22,500 for a down payment in order to purchase 2 years from now, you would need to be saving approximately $938 each month.

If you wanted to save $20,000 for a down payment to purchase in 3 years from now, you would need to be saving $556 each month.

Knowing how much you need to save each month, can really make it easier to figure out between you and your partner (if you are purchasing a home together), what the total needs to be that you will contribute and then you can discuss how you will break down what each person is contributing.

Pay Off Credit Card & Consumer Debt First

Focus on paying off any credit card debt or consumer debt that you may have, so you have this high-interest rate debt paid off. Then you can “roll over” the money that you were paying towards these debts, to use as extra money to put into your house down payment fund.

Related Content:

Save Your Tax Refund

If you or your partner receive a tax refund, you can use this money to beef up your house savings fund each year.

If You Get a Raise or a Bonus, Allocate That Money Towards Your Home Fund Right Away

Anytime that you receive a raise, immediately set it up so you don’t have that “extra” money going into your account, but instead into your home savings fund. The reason I say to do this as soon as it happens, is because you don’t want to get used to having this “new” amount of money, because it is so easy for your lifestyle to increase (also referred to as “lifestyle creep”), which I see happen all of the time.

Increase Your Income

I love when people are also willing to increase their income, not just “reduce expenses.” I think it is a beautiful combination when you use both methods, to be able to save extra money towards home ownership.

There are many options you can use to increase your income:

Sell Your Items and Make Extra Cash

This strategy won’t help you to save your whole down payment, but it can actually help to really beef it up! There are so many things you have that you don’t really need or use anymore, that you could sell and make some money from. I’ve personally made $9000+ just by selling my items in Facebook groups, I have an entire post about how I did it here. I also did a week long challenge teaching other women how to do this and the total that was made in a week was $13,225!!

A lot of people will think this is too much work and bypass on this suggestion, but if you do it and commit to it, the rewards can be absolutely worth it.

A couple of tips to boost the amount that you can make from selling your items:

Get a goal that is a little uncomfortable, that feels a little out of reach. Every time I tell my financial coaching clients to set a goal for the amount that they want to sell, they get way more sold than if they were just “winging” it, because they’ve put an intention behind it.

Make sure each time that you get cash or an e-transfer for your items you’ve sold, right away you transfer that money to your home fund.

Use Cash for Groceries & Eating Out & Put the Money You Save Towards Your Down Payment

One of the fastest ways that every person can save money, is on their groceries and eating out. As an online financial coach, I consistently see from all of my clients that this is an area that can be tightened up. I have a blog post I wrote about ways to save hundreds on groceries every month, that you can check out here.

But the number one to tighten up your grocery and eating out costs really quickly, is to use cash! When you use cash it makes money more tangible again and as you see the cash going down in your wallet, you tighten your spending on groceries and eating out. I use this strategy with myself and my financial coaching clients and it works SO well to save money!

Sit Down and Go Through All of Your Subscriptions & Fees

The “little” fees can so quickly add up and be making a big dent in your savings goals over time. Go through your bank account, your credit card statements and your apps and total up how much you are spending on subscriptions and fees.

Go Through “Little” Expenses Such as:

  • Banking Fees, choose a no-fee bank
  • Cable
  • Spotify
  • Monthly subscription packages
  • Sirius Radio
  • Apps
  • Magazines
  • Etc

I’ve had clients who have saved $300+ a month in subscriptions that they really didn’t really use that often and were totally fine with giving up! Right there that’s an additional $3600 a year you can easily put into your home fund!

Monitor Your Credit Score

This is something that is really important to do, but I don’t hear enough people talking about it. When it comes to your credit report and your credit score, those with low credit scores can end up paying $100,000+ over the course of their lifetime due to having to pay higher interest rates because of their low credit score. And purchasing a home is your biggest financial purchase you will likely make in your life, so the difference you could pay in interest on a home, really adds up if you have a low credit score!

It is also important to monitor your credit score in case someone else has made fraudulent charges or if there were errors made on your credit report that don’t actually belong to you! Many times you won’t actually know if this is an issue unless you look into it and frequently monitor it yourself!

If there is fraudulent activity on your credit report or a reporting error, it can lower your score and therefore increase your interest. Even a small increase in your interest rate can have you paying tens of thousands of dollars more in interest, that you shouldn’t be paying! That is why I recommend for you to check and monitor your own credit score.

Now I know you might be worried about dropping it by checking it. That is only true when someone else is pulling your credit score, not when you are checking it yourself. I find out my credit score once a month and I have a very high credit score. For Canadians, I recommend that you use Borrowell to check your credit score, that is personally who I use and who I recommend for my clients to use as well.

If you are American, I recommend Credit Karma.

Want to Speed Up the Time it Takes to Save for a Down Payment?

If you want to significantly speed up this process by getting financial clarity in your situation right now and to figure out a budgeting and cash flow system that works really well for your specific situation,  I encourage you to read more about my Personal Finance Clarity Session. As a financial coach, I have helped many to save hundreds to thousands of dollars a month and to achieve their financial goals years sooner.

I hope you enjoyed these tips to help you grow your home fund quicker!

I would love to hear which ones you enjoyed the most, comment below!

Other Content You May Find Helpful:

 

I am very active on Instagram, follow me here for more financial tips & tricks: http://instagram.com/mandyythomas (@mandyythomas)

Do you have any questions or anything to add? Leave me a comment in the comments below and I will respond back to you!

Leave a Reply

Your email address will not be published. Required fields are marked *