First, conduct a comprehensive audit of your finances.
For starters, are you able to pay your existing bills on time? Do you have the funds you need for a down payment? What amount can you commit to pay monthly, considering the mortgage and property taxes?
It’s rare to pay cash for a home, so the concept of “within means” expands to encompass the down payment and monthly payments such as the mortgage, property taxes and other utility fees. Each of these factors will impact your mortgage rate and, ultimately, your credit.
The smart home buyer will also budget additional funds for the unexpected costs that inevitably follow almost every real estate purchase. For example, what happens if you invest all your savings in the house and a month after you move in the furnace breaks? When you’re renting an apartment and something breaks, the landlord is required to fix it. But when you own your home and something breaks, there’s no landlord to call — it’s your responsibility.
Being ready to buy a house means taking the long view and considering your financial capacity to not only make preplanned payments on time, but account for home maintenance and other unplanned expenses.
Another measure of your readiness is your credit picture.
Have you checked your credit report for errors? You can do this for free on a weekly basis at AnnualCreditReport.com. If you see an error, contact the credit reporting agency immediately to get it corrected. It’s important that lenders are looking at accurate information when weighing your viability as an investment.
Do you have any major flags on your report that are dragging down your credit score? If you do, you might consider waiting another year or two. Your credit report influences your mortgage eligibility and the rate you qualify for — if you don’t have strong credit now, allowing some time to pass while you work to reconcile and rebuild will reduce the effect of those negative marks.
A missed credit card payment from a year ago could yield a mortgage rate that is a quarter point higher — and while that sounds minimal, it can mean thousands of dollars in increased mortgage payments over 30 years.
Making the wrong investment now can affect your credit — and eligibility for future purchases — for years to come. Because a mortgage is a loan secured by your home, the bank can foreclose if you can’t afford your monthly payments. And not all credit is created equal — a foreclosure on your credit record can make it very difficult to get credit of any kind in the future.
Homeownership can be a smart financial move, but if you aren’t ready, it can affect your viability as a consumer and smart investment for lenders down the road. So do your homework before you buy — that way, you can maintain your credit reputation and spend your money where you want. Otherwise, you might waste it on higher interest rates for your mortgage, credit cards, car loans and more.
Francis Creighton is the president and CEO of the Consumer Data Industry Association (CDIA) based in Washington.
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