Buying a House: Get Your Finances in Order

By: Paige Martin

When you want to buy a house, the most important step is to get your finances in order.

This should be done before anything else, as it will provide you with a general idea of what you can afford for a down payment and most importantly, it will give you a better sense of how much home you can afford. There are a few steps that you can take to make sure that you fully understand your financial situation and to make repairs in areas that need it.

First and foremost, a budget needs to be set. Many people create budgets and end up not following them because they are not realistic.

To prepare a realistic budget, gather receipts for six months and then total them up to see where you are spending money. It is easy to budget for things such as rent and car payments but there are always unexpected items, such as car repairs or illnesses that have bills attached to them and it is essential that these items be included for a realistic financial picture.

Along with creating a budget, make sure you know exactly what you are spending money on. By looking over expenses for one month, there are probably many items that don't need to be purchased. Lottery tickets, daily cups of coffee, and other small items can really add up quickly and can be a great money saver if they are eliminated from the expenses.

And of course, you need to get rid of as much debt as possible. Most lenders will be more open to give a loan to people who have debt less than 36 percent of their total income. The mortgage will be included in this figure and the mortgage alone will generally be 26 to 28 percent. This only leaves 10 percent for other loans such as car loans, outstanding credit card debt, and any other type of debt.

Of course, the only way you can reduce debt is to pay it off. To do this, you may need some extra income. A second part-time job may be necessary to do this. Even if you don't have that much debt, extra income will come in handy when it comes time to make a down payment.

Usually lenders will only ask for a 5 percent down payment. However, the more you put down, the less the mortgage payments will be and you may end up with a lower interest rate. Aiming for a 20 percent down payment will generally serve you best in the end.

Make a house fund part of your monthly expenses. Sometimes putting away whatever you have left at the end of the month will often be an amount of zero. Decide on a number and stick to it.

It's also important that you have the same job for at least two years before applying for a mortgage. Any time less than two years is viewed as high risk by lending companies and you may end up with higher monthly payments or interest rates.

And lastly, make sure you have good credit history. Eliminate bad history by paying off debt and if you have no credit, get a credit card and make the payments on time. This will help when lending companies are considering giving you a loan.

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