If you can pay your bills on time and still have money left over at the end of the month, you’re financially solvent, which is important when you’re considering buying a home in the future. It’s vital to be able to save money, whether you’re planning to pay cash or use a mortgage when you guy. Proof that you pay your financial obligations on time – and save money – can lead to better loan rates and terms.
It takes time to get back on your feet after a financial disaster. It also requires patience, hard work, and teaching yourself new habits. The sooner you start, though, the sooner you’ll be unlocking the door of your new house.
Set Up a Budget
If you don’t have a budget, the time to create one is now. We know, we know. Creating a budget is no one’s idea of a good time. It takes time to create a budget, and sticking to it can be challenging. You can make it easier on yourself by using personal finance software or a spreadsheet.
First step? Determine how much money comes into your household every month. Consider all sources of income from all family members.
Next, get out your bills and make a list. Divide them into fixed and variable expenses. Fixed expenses include your car loan payment, mortgage payment (if you have a fixed rate mortgage), or rent. Variable expenses include utility payments, groceries, and incidentals.
Over the course of a month, keep track of every penny you spend, from bills to gas to your morning latte. At the end of the month, enter these numbers into your budget under “expenses.”
This will give you a picture of where your money goes every month and an indication of where you may be wasting it. Cut out the waste first, directing that money to the rest of your plan.
Pay Off Debts
Make your debts and your bill payments a priority every month. Along with paying your monthly bills, ensure that secured debts, like car or mortgage payments, are paid first. Pay at least the minimum payment on your credit cards and unsecured loan repayments – except for the one with the highest interest rate. Pay a little more on that debt every month until it is paid off. Then, that working on the one with the next highest balance. (Financial guru Suze Orman suggests cutting up all of your credit cards except one and to keep that one at home, using it only for emergencies.)
Paying your bills on time and paying off your debts helps to improve your credit score. Borrowers with a credit score of 760 or higher qualify for the best mortgage rates.
Make Changes in Your Spending Habits
After focusing on your budget for a few months, you’ll find areas where you can cut back on spending. Consider riding public transportation or carpooling rather than driving alone, packing a bag lunch rather than eating out, and being more frugal when you shot. Be brutal in your budget cuts – each one will get you closer to being able to afford your new home!
Make More Money
Cutting your spending and paying down debt aren’t the only way to move down the road to home ownership. Finding ways to make more money to bring in extra cash. Consider volunteering for overtime hours at work, taking on a part-time job (Uber and Lyft are always hiring!), or selling unused items on Craigslist.
Once you have your debt under control, it’s time to start saving money! Unless you’re paying cash for the home, you will need money for a down payment and closing costs. And don’t forget all those extra items you’ll need once you move in! Plan on accumulating at least 3 to 4 percent of the loan amount for closing costs, and 3.5 to 20 percent, depending on the type of loan you obtain, for the down payment.
It’s not easy to clean up your finances and save money. Keep your dream home in mind, and you’ll stay motivated!
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