Is 2021 the year you become a homeowner? Or make that long-overdue trade up to a larger home that fits your growing family?
Buying a home is the largest financial transaction and the largest asset most Americans ever own. It’s usually a long, tedious journey with plenty of twists, turns, and delays along the way—which means you should start now.
Begin with these steps to start laying the groundwork immediately, because some of them take time to complete!
1. Improve Your Credit
Your credit score matters. It often means the difference between a 3% and a 5% interest rate, or a 20% down payment and a 3% down payment. It even impacts your ability to remove mortgage insurance from your monthly payment — more on that later.
It can take months or even years to improve your credit, so start now. Begin by pulling your free credit report from AnnualCreditReport.com, the official site designated by federal law. Look for any errors and contact the credit bureaus to remove them.
Then focus on paying down your rotating credit balances, if any. Get each of these down below 30% of their credit limit. Better yet, pay them off entirely so you stop blowing money on high-interest consumer debt.
If your problem stems from not having built enough credit yet, try a credit builder loan. These aren’t actually loans per se, but rather you agree to make regular monthly payments to a “lender,” who simply sets the money aside for you each month. They report the payments as loan payments to the credit bureaus, and at the end of the loan term, you get your money back. Try Self as a reputable example (I’ve used them myself).
With stronger credit, you position yourself for lower interest and lender fees, a lower down payment, and more options for mortgage loans.
2. Save a Boatload of Money
If you want to buy a house this year, then this is the year you need to get serious about savings.
Ditch the cigarettes and $5 lattes. Stop ordering take-out or delivery and learn how to cook like a grownup. Quit blowing money on new clothes every season. Cut your cable subscription.
Beyond those obvious ones, look at ways to save money that you haven’t tried before. Get creative with it, and consider even extreme budgeting ideas.
My wife and I save over half our income each month. And no, we don’t earn massive salaries. We’ve just gotten really creative in eliminating our housing and transportation costs.
You can save $50,000 in two years on the median U.S. income. But not if you live like the average American.
As a homebuyer, you’re going to need money for three huge categories. First, you need to save a down payment, which could cost you tens or even hundreds of thousands of dollars. Second, you need money for closing costs, which often exceed $10,000.
Finally, you need money for cash reserves. You need an emergency fund as a responsible adult, but even if you think you can cut corners and skip it as an irresponsible adult, lenders still require you to have cash reserves at settlement.
Plus, as a homeowner, you’ll incur plenty of surprise repair bills. More on that shortly.
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