Purchasing a new home is probably the biggest personal and financial decision of a lifetime. Depending on your reasons for purchasing the home, you'll likely spend five to ten years in it. Thus, you want to make absolutely sure you adequately prepare at least two years before your purchase. Here are some general guidelines for preparation:
1) Perform a financial assessment. Gather all your reams of paperwork on your various assets; mutual funds, stocks, IRAs, 401Ks, checking/savings, and money market accounts. You should never use your retirement funds to purchase a home; but you will need this information when the lender asks you to list your assets during the loan approval process.
2) Determine affordability. Will you be able to afford a home one or two years from now? Are you in a steady job with reliable income? Is your spouse also gainfully employed? Do you have more than $15-$20K in the bank that you can use for the down payment and closing costs? Be sure to factor in the cost of movers, upgrades to your new home (carpet, paint, etc.), furniture, lawn care equipment, appliances, and potential repairs.
3) Determine your preferred loan type. Adjustable rate mortgages (ARMs) are more flexible, but not so great in an environment of rising mortgage rates. Traditional loans require 20 percent down to avoid monthly PMI (private mortgage insurance) charges. That means you'll have to put down $40K on a $200,000 home. However, there are still low down-payment programs out there such as an FHA loan depending on qualification. And because lenders know that very few people have $40K just lying around collecting dust, most have plans that prove more flexible. But zero down payment programs? A thing of the past.
4) Erase your debts. The solution to improving your debt-to-income ratio is to erase your debts wherever possible. Debts appear on your credit report, which negatively affects your ability to obtain a home loan at a competitive rate. Focus on paying down your credit cards, paying off your car loan if possible, and other debts you may have accrued over time.
5) Save, save, save. In today's world where everything is growing ever more expensive and salaries simply aren't keeping pace, it is ever important that you look for ways to save money for a down payment. Maybe it means replacing the daily cup of coffee with a home brew. Maybe it means packing your lunches, eating cereal for breakfast, or eating out only twice per month. If you are financially savvy, perhaps you could invest a sum of money in a mutual fund, money market, or CD. Some financial experts even recommend opening a bank account for the sole purpose of saving money for a home, akin to a piggy bank.
Purchasing a home can be overwhelming, but with adequate preparation, you can walk with confidence to the closing table.