If you feel like you’re throwing away money every month for rent and would rather start building equity yourself, you’re not alone. Although renters account for 37 percent of all households in America, half considered buying a home instead, according to the Zillow Group Consumer Housing Trends Report 2017.
Even though many renters would like to become buyers, finances are often a big concern for renters wanting to make the jump to homeownership. Fortunately, with some help and planning, renters can take steps now to prepare for homeownership in the future. Here are a few ways you can prepare your finances to get out of the renting world and into the life of homeownership.
1. Save for a Down Payment
Sourcing together your down payment is one of the first things you’ll need to get started on before you’re able to buy a home. Unless you’re eligible for a $0 down VA loan, chances are you’ll need at least some percentage of the home’s value in cash. Saving up money or bringing in more money can be challenging, and even more, time consuming. It’s important to get started on this phase early in the home searching process so you’ll have enough saved by the time you’re ready to pounce on your dream home.
Most commonly, people source their down payment the old-fashioned way—saving up over time. If you’d like to move faster, or source your down payment in multiple ways, you could always try cutting back on your current spending, selling your unused belongings, and adding in some side work after your regular 9-5. See more creative ways to save for your down payment.
2. Review Your Credit Report
Lenders will use your FICO score to determine whether or not you’ll be a safe borrower or if you’re more likely to be risky. So getting your credit score in order is one of the most important steps you can take towards homeownership. Even if you think you have near-perfect credit, taking a close look at your credit report can prove to be valuable.
By getting a copy of your credit report early in the process, you’ll have plenty of time to review it for any errors, and then have time to dispute them, if necessary. It’ll also give you clear insight as to what your credit score is if you don’t already know. Minimum credit score requirements are about 580 for FHA loans and 620 for conventional loans. So if you discover yours is lower than that, you’ll have time to work on it to bring it up so you can qualify for a loan. Since checking your own score is considered a soft pull, so you can rest assured that it won’t hurt your credit.
A higher credit score could also help you score a better interest rate, so the earlier you work on improving your credit score, the more you could save in the long run.
3. Stop Making Big Purchases
Buying a house is expensive, so being able to show you’re financially stable will help reduce scrutiny from lenders while you’re trying to get approved for a loan. In general, lenders don’t like to see a flurry of recent big purchases. So, if you can hold off on buying that new TV or going on a big trip, you might help lenders view you as a lower-risk borrower.
In addition to cutting back on big purchases, try to avoid opening up new lines of credit. Having multiple credit lines can be an indicator that you don’t have the money you say you do and lenders could be less inclined to approve you for the loan you want.
4. Use Calculators to See What You Can Afford
One of the easiest ways to see how much you can afford for before you actually go through the pre-qualification process is to play around with an affordability calculator. You can use our affordability calculatorto plug in information about your income, monthly debts and down payment information to figure out how much you could realistically afford, as well as how much your monthly mortgage payments will be.
If you’re wondering if it’ll be cheaper for you to buy or rent, you can use the rent vs. buy calculator. This is often referred to as the breakeven horizon—how many years will it take before the cost of buying equals the cost of renting. If you plan on staying in your home past the breakeven horizon, buying might be the better option for you, but if you think you might move or are in a temporary position, renting might pencil better.
5. Get Pre-Qualified
If you think you’d like to buy, getting pre-qualified now can help give you insight into whether you’re actually ready. Knowing how much you’ll qualify for, or even if you’re eligible for a loan, can help reduce some stress later on, and help you search for homes in your price range.
In the pre-qualification process, a lender will take into account your income, debts, assets and other details to assess how much they’d be willing to lend you. If your lender happens to uncover any red flags, you’ll get a clear picture of what steps you’ll need to take in order to qualify for a loan. And if you’re going through the pre-qualification early, it’ll help ensure you’ll have enough time fix any issues before you’re ready to become a homeowner.
Sometimes, lenders will provide pre-qualification letters without doing a hard credit pull, so you won’t need to worry about it hurting your credit. And you are not obligated to work with a lender once you are pre-qualified, which makes it a no-risk way to see where you stand.
Once you are ready to buy, getting pre-qualified can help you be able to move quickly and make an offer as soon as you find your dream home. With pre-qualification under your belt, both agents and sellers will take you more seriously. It shows agents that you’re organized and fully prepared to be a buyer, and that you will be approved for the amount needed to buy the home you’re making an offer on.