Wishing without planning will not make it so.
- It’s important to have a good idea of your income and expenses before trying to buy a home.
- Paying off debt increases your credit score and frees up income.
- Home ownership costs money upfront, so saving as much as you can is a good way to prepare for the purchase.
I have lived in rentals most of my life except for a few years as a very young child and two years as an adult. I bought a house in the city where I lived and worked in 2010, but following a layoff and then a divorce, I became a tenant again two years later (and then made a short sale on this property). I have lived all over the United States, in apartments of all kinds as well as single family homes. I’ve moved 10 times in the last 10 years since I last had a house with my name on the deed.
If all of this sounds tiring to you as a reader, imagine how tiring it was for me to experience it (and packing/unpacking all those times). Thanks to a career move to remote work last year, I can now decide where I want to live. I really like the city I’ve been living in for a year, so I dream of buying a house there in the next few years. I have a plan to get there, and I’m laying the groundwork right now.
Evaluate my expenses and increase my income
As a tenant, my housing costs are quite simple to understand. I know how much I pay for rent each month (and that cost is guaranteed on an annual basis by the lease I signed), and I know how much the tenant insurance premium is costing me. I’m staying in my current house for the time being, and since I’ve already spent a year here, I already know approximately how much my monthly bills will cost me. But I won’t be able to anticipate home ownership costs up front with such confidence, as some of them will vary over time, and owning a home can be full of financial surprises in the form of repairs and maintenance. . At this point, it’s hard to know how many houses I will be able to afford in a few years. But by increasing my income now, I’m making sure I can keep my housing costs to 28% or less of my income.
Pay off my debts and improve my credit
I’m spending 2022 repaying my debts to wipe the slate clean. After years of financial setbacks, costly out-of-state moves, and jobs that didn’t pay enough for me to focus on the future, I’m finally able to make positive changes. This has the added effect of increasing my credit rating and lowering my debt-to-equity ratio before I apply for pre-approval for a mortgage. Getting out of debt and improving my credit profile will give me the best chance of qualifying for the most competitive mortgage rates.
Save for a down payment and other expenses
The final part of my plan is to save money for a down payment and closing costs, and other miscellaneous expenses that I may incur in the first year or so of owning a home. I want to put down a 20% down payment to avoid paying private mortgage insurance and be a better borrower for a lender. It’s easy to use the internet to track the cost of homes in my neighborhood, so even though the housing market is hot right now, I have a rough idea of how much money I’ll need to save for that down payment.
My closing costs will probably be 2% to 5% of the purchase price of my future home. And I would like to have some extra money set aside to cover any additional costs I may have upfront. A good rule of thumb for maintenance costs is to expect to spend about 1% of the value of my future home each year to maintain it, and that might be higher for nice older homes in my small town .
For now, I am committed to continue renting for at least the next two years. But hopefully the work I’m doing now to shore up my finances, plan for homeownership costs, pay off debt, and save money will improve my chances of becoming a homeowner in a few years.