From Renter to Buyer- 4 Tips for Budgeting

Budgeting before buying a home is keyIn today’s  economy, many people live paycheck to paycheck.  However, if your goal is to buy a home, you need to get a better strategy. Budgeting needs to take priority.  Most people need to sacrifice a little and stick to a budget in order to save for a home. A good budget plan should begin one or two years before you make an offer on a home. Here are four tips for renters who plan to become homeowners.

Build Strong Credit

When it comes to securing a loan at the best mortgage rate, credit is king. The most important focus for all potential buyers should be improving their credit score. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate. Potential buyers should request their credit score. Some people who think they have good credit don’t, while people who think their credit is bad may be surprised that it is actually OK. Everyone should check their report for accuracy and fix any mistakes. It can take months to correct errors. To improve  your credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances on every account to less than 30% of the credit limit. People often do not realize the consequences of paying bills late or missing a payment, which can affect your credit report for a long time. Also, it is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer.

Save Cash

Future buyers should create a simple budget and set a savings goal.Try making “virtual” mortgage payments today to build up savings and learn to budget for actual mortgage payments down the road.Renters can estimate a mortgage payment and set aside the difference between that payment and their rent each month. If you are paying $800 in rent and estimate your mortgage will be $1,100, you can put $300 per month in a special savings account. Not only does this help you save for a down payment, but it demonstrates to a lender your ability to afford that higher housing payment. If you find you can save $300 a month, then you will have $3,600 at the end of the year.Lenders say they want to see that pattern of savings, and buyers will need at least 3.5% for a down payment on a FHA loan or at least 10% for a conventional loan.

Reduce Your Debt

While buyers increase their savings, you should also reduce your debt. Lenders want to see that you are managing your debt and keeping your credit-card balances low.  Debt to income ratios are an important element in a loan approval. This ratio compares minimum monthly debt payments to gross monthly income. If your debt-to-income ratio is over 50%, you need to pay off your debt before even thinking of buying a home.

Get Yourself Educated

Although it might be premature to visit a lender two years before a home purchase, it can be valuable for consumers to know if they qualify for a mortgage. Visit open houses. A lot of people have no idea what $300,000 or $400,000 will buy. The more you look at places and neighborhoods, the better understanding you will have of the value in a home.


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