I’ve been thinking about writing series this for a while now, and I figure now is as good as time as any! In case you are unaware, my boyfriend and I purchased our first home in March this year. We’ve done a good amount of renovations and handy work since the purchase and are loving our new home (follow along on Instagram stories!) Because we are pretty young to be homeowners, I thought it might be interesting to put together my thoughts and advice on the process! I know a lot of people my age are clueless (I certainly was) with where to start to buy a house, and I don’t know about you guys, but both my and Tucker’s parents bought their homes like 30 years ago and were not so helpful on the nitty gritty details haha. SO, I’m gonna LAY IT ALL OUT THERE in millennial-speak for you to enjoy. Here is part one of this series: prepare.
Full disclosure: Tucker and I are two years out of undergrad. We both have engineering degrees and both work full time in high paying jobs in our fields. Obviously, we are extremely lucky and work hard to be in the position we’re in, but I recognize that this is not true for most people, especially at our age. However, I think that most of this advice applies to anyone who wants to buy a house.
Before you start devouring Zillow and making Pinterest boards, you need to do some heavy preparation to get ready financially to buy a house. I am certainly not a finance professional by any means, but I’m pretty good with money and budgeting and have read a lot of articles around personal finance. The following advice should be taken as friend-to-friend advice – if you have specific questions involving your situation, I suggest reaching out to a financial advisor! A lot of employers offer financial literacy classes or free sessions with advisors, check with your company to see if it’s available. I personally did not seek out an advisor, but our situation wasn’t that complicated – everyone’s process is going to be unique!
With all that mumbo-jumbo said, the first step is (obviously) to start saving. Buying a house is EXPENSIVE. You’re going to need money for a down-payment. We put 5% down, meaning we paid 5% of the house purchase price up front, but most resources recommend 10%+ to avoid extra fees and whatnot – more on that in another post. My next post is going to dig into figuring out how much you can afford and how much you need to save. On top of the down payment, you will also generally pay things like inspection and closing costs, as well as you’ll need moolah to move. Spend the time to get your budgets in order and save save save. Tucker & I both use Mint religiously, which is free and has a great tool for setting a budget and goals and monitoring them over time – I’ve also heard good things about YNAB, though I’ve never used it.
I think it’s really important to have your emergency fund set aside before you start saving for a down payment. The general rule of thumb for an emergency fund is having 3 months of living expenses set aside in an easily accessible (but you don’t touch it) account in case of emergencies like medical expenses, loss of job, car problems, etc. This becomes even more important when you own a home because you’re on the hook for a mortgage! Do not include this emergency fund in your down payment money, you will still need this after you buy the house!!
We decided to have $5,000 saved in addition to our down-payment and emergency funds, just for moving costs and things we knew we would forget. I am so glad that we had this cushion, because it made this whole process a lot less stressful. There are always things that you don’t remember to budget for – you may need fix or replace something right away, buy an appliance, or even just regular house things that you always need (um, lawn mowers, vacuums, basic tools, light fixtures… etc.) This is, of course, not 100% necessary to buy a house, but I think it’s really good for peace of mind. And anyways, if you get through the whole process and don’t touch the money, you’re always going to need to buy furniture and whatnot after you move. You’ll thank yourself later.
Build a Strong Credit Score
Alright, now that we’ve covered what you need to save for, the next thing is super important to start ASAP and this is to get your CREDIT IN ORDER. Do you know what your credit score is? Even if you aren’t looking at buying a house right now, it’s important to have a good idea of where you’re at (and what direction you’re trending). Credit takes a long time to build (and even longer to fix), so if you have the intention to purchase a home in the future, your credit score is something to keep on your radar. Mint has a credit score estimation tool built in that gives some idea of what your credit score is on a monthly basis. Tucker & I also use Credit Karma to get monthly reports from Equifax and TransUnion (two of the credit report agencies) – this is also a free services that I highly recommend. It gives a breakdown of all the things that are helping or hurting your score. Your credit score directly impacts if you can get approved for a mortgage, how much you can get approved for, and your interest rate. It’s the best metric the bank has on you as a borrower.
If you do not have any credit (i.e. you have never borrowed money or do not have a credit card), you’ll need to build some before you apply for a mortgage. I would suggest starting with a bank credit card (NOT a store credit card) with an institution you already bank with. I got my first credit card when I turned 18 through Wells Fargo, as that’s where I had my savings and checking accounts. Make your payments on time and don’t carry a balance, if you can help it. Contrary to popular belief you do not need to carry a balance to build credit. Pay off your bill every month, you are still building credit! Other ways common ways to build credit is through student or car loans.
Other important factors in your credit are your number of accounts and age of accounts – yep, you want to have a variety of accounts for a long time. That does not mean you should go an open a bunch of accounts all at once! Each time you open an account, the lending agency “pulls your credit”, which shows up on your report for a period of time as a “negative”. Your credit score is something you will work on for the rest of your life – go slow and check in regularly! Credit Karma is a great tool for this that I cannot recommend enough.
Another factor in your credit score, as well as your mortgage application, is your debt ratio. For your credit score, this is the ratio of debt to available credit – i.e. if you have $100 on your credit card that has a limit of $1000, your ratio is 10%. You want to keep this ratio LOW, like sub 5% if possible. I pay off my credit cards every month so it generally hovers between 2-3% which works out well for me. Another way to improve this number is to have a higher credit availability. If you’ve had a credit card for a long time and are making regular on time payments, you can call your credit card company and ask for a higher credit limit. Sometimes they will have to pull your credit to do this, but sometimes not, it’s something to inquire about and see what their policy is. Something to think about!
So, to recap, there are two major things you need to do to prepare yourself financially to buy a house: save and get your credit in shape. I think the biggest thing is getting a handle on your monthly budget, which will not only make the preparation easier but also make your buying experience much smoother because you’ll have a good idea of what you can actually afford. Unfortunately, lenders are happy to give you a mortgage for way more than you can comfortably afford and you definitely don’t want to have a wonderful new home but be able to afford to enjoy it – so being acutely aware of how you’re spending your money is critical. One more note, if you are buying a home with a partner, this is a great time to define your financial goals (if you haven’t already!) and set expectations for spending and lifestyle in your new home.
OK, that’s it! My next post in this series should be a little less dry – it’s time to FIGURE OUT WHAT YOU WANT.
Happy saving! 🙂