How to Prepare Your Finances for a Home Purchase
A home is one of the most significant purchases you’ll make. That’s why it will be important to make sure you have all the information you need. The Cheat Sheet spoke with Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial, for her expert tips on how to prepare your finances for a home purchase.
Also stay tuned for upcoming stories on how to negotiate a home price and tips for keeping up with mortgage payments.
The Cheat Sheet: What are some things consumers should do to get their finances in order before buying a home?
Marcy Keckler: Shopping for a new home is an exciting time and you want to be sure you start off headed in the right direction. It’s really important to set a budget and stick to it. Be realistic about what you can afford so that you don’t get in over your head. Also, consider speaking with a lender about different loan options to help determine what will work best for your financial situation.
CS: How can home buyers save up enough for the down payment?
MK: If you haven’t already, set up a savings account specifically for your house fund. Map out your current cash flow, and think about delegating a set amount from your paycheck to be transferred into the fund each month. You’ll also want to keep closing costs, interest rates, and other hidden expenses in mind when saving for a home. If you are having trouble jumpstarting your savings, track your spending and cut down on the extras. You may be surprised how much you are spending on dining out or for your daily cup of coffee; these are costs that can really add up.
CS: Generally, how much should you put down on a home?
MK: It really comes down to what you can afford because every financial situation is unique. If you have the means to put down 20% or even more, I would recommend it. Otherwise you may need to put down anywhere between 5% and 20% to qualify for a loan, depending on your situation and the type of loan.
CS: What can homebuyers do to get their credit in shape before applying for a mortgage?
MK: It’s no secret that a higher credit score will qualify you for a better mortgage rate. Be diligent about keeping track of your score because it really can make a huge difference for large purchases such as a house or a car. If your score is not where you would like for it to be, it may take some time to boost it. Reducing your total debt, and making all your payments on time are key things that can add points to your score.
CS: If you have the money to purchase a home with all cash, is this usually the best way to go?
MK: When deciding to pay for a home in cash or move forward with a mortgage, there is a lot to consider. While paying in all cash will certainly look attractive to sellers and mean no future mortgage payments, you don’t want to leave yourself strapped for cash either. A mortgage could give you more liquidity should unexpected expenses come up. You’ll want to keep current interest rates and investment markets in mind because it could make more sense to invest the cash instead.