The American dream—owning a home with a white picket fence—just may be alive and well. There are trillions of dollars’ worth of mortgages in the United States, with a surprisingly low amount of them in delinquency. That demonstrates that not only are Americans affording homes, but they’re doing it without missing frequent payments.
If you want the same for yourself, you may find there are a number of things to do with your personal finance situation before you get your first mortgage. Putting yourself on solid financial ground won’t only set you up for fewer headaches in the future, but can even yield lower mortgage rates when you do finally apply for that first home loan. Here are some smart money moves to make as you prepare for a home loan:
Create a Savings Buffer
Before you get a home mortgage, you’ll want a buffer of separation between you and the so-called “real world.” Home ownership, after all, is fraught with potential costs that you’ll have to cover yourself. If your water heater blows, there’s no landlord that will come to fix it—you’ll have to pay to fix or replace it yourself.
Creating an emergency fund is an important step to ensure you won’t stress out when a faucet starts to leak. Generally, personal finance experts recommend that you acquire up to 3-6 months’ worth of income. That means that even if you were laid off from your job, you would have up to half a year to secure a new source of income before you had to worry about making ends meet.
Manage Your Credit Effectively
When you apply for a home mortgage, you may notice that a credit report is part of your overall application. Why should your credit report matter? Because your credit score demonstrates your ability to handle debt—and your mortgage is, in all likelihood, the most debt you’ll ever have to manage. A bank wants some degree of confidence that you’ll live up to your promises when it comes to the mortgage payments.
How much of an impact will your credit score have on your mortgage? A credit score can mean up to $45,000 in savings or added expenses, depending on the quality of that score, according to an article by CNBC. Although you may never see what you would have otherwise paid for your mortgage on your mortgage statement, your credit score can have a real impact on your payments — and therefore your quality of life.
A lower monthly mortgage payment means more of your income stays in your pocket, which you can save, invest, or spend.. You can achieve a high credit score and best position yourself for a mortgage by managing your credit and paying off your cards in full.
Want to know some of the best practices for managing credit? Here are some smart money moves to make as you handle your credit cards:
- Set up automatic payments for your credit cards. The more automatic the process is, the easier the habit will be. Make sure you leave enough room in your checking account each month and initiate a monthly review of your finances to ensure this process happens smoothly.
- Make payments with credit cards. Sounds counter-intuitive, doesn’t it? But if you put more major purchases—such as furniture—on your credit cards, you’ll not only get extra rewards points for your efforts, but you’ll prove your ability to handle debt. When you handle things only in cash, you don’t get the added credit score benefits. If it’s all the same to your bottom line, which is better?
- Plan for major life decisions. Don’t just think about the status of this mortgage as it is right now. Consider where you want to be three years from now. Five years from now. Ten years from now. How does a mortgage fit in with your life goals? If you say, “maybe I can afford this mortgage in ten years” and use that as an excuse to get more house than you can afford, you’re not planning—you’re hoping. Plan in a realistic way.
Building your credit and taking on a reasonably sized mortgage can be some of the best decisions you ever make in your financial life. Make sure you approach it cautiously, but also that you’re willing to take action today to make your dreams happen tomorrow. When it comes to home mortgages, they can be more affordable and accessible than you may think—as long as you approach them the right way.