When it comes to buying a home, having your finances in order is one of the most important parts of the process. While it is good to understand how many rooms might work for your family, if you want hard wood floors vs. carpet, or how big your yard should be, without having your finances in order, you won’t be able to buy your dream home.

Here are 3 key aspects to keep in mind when it comes to financing your first home.

  1. How Much Can You Afford

When you find yourself ready to buy a home, the first step is to determine how much home can you afford.  To figure this out, you will need to gather a few pieces of information. Calculate your monthly income, the amount of debt you have, your monthly expenses, and how much you will pay on taxes and interest.

The goal is to make your monthly mortgage payment less than 30% of your monthly costs.

Websites like Redfin are great resources as it pulls the cost of the home, and the taxes to give you a rough estimate of what your monthly payment will be. Every person has a different level of comfort when it comes to their finances. Understanding where you feel comfortable is an important part in buying a home.

Oftentimes home buyers are told they are pre-approved by a lender for a monthly cost that they personally do not feel comfortable with. Simply because you are approved for a certain amount, does not mean that is the price that is best for you.

This was the case for Melissa and Matthew, a couple from the suburbs of Chicago. They were pre-approved for a mortgage of up to $475, 000 depending on the real estate taxes amount. The area they were looking to buy varied greatly on the property tax. That number would impact how much they could actually afford.

When they broke down the numbers, they did not feel comfortable paying that high of a monthly payment. They had a financial goal to have at least a 20% down payment and to keep their monthly payment under $2,500. In the end, they chose a house that met these criteria which happened to be a significant under the amount they were pre-approved for. This decision helped them feel comfortable in their purchase.

  1. Determine How Much a Home Costs

Determining how much a home will cost seems like a simple point, however, when you factor taxes and the interest rate, it can drastically change the cost of a home – a point sometimes left out.  A home that has taxes of $12,000 a year vs. $8,000 can make a huge difference in your monthly payment. When you figure out how much a home will actually cost on a monthly basis, it will help you make a better decision. A home might even have a higher listing price than another, but have lower taxes, making it a more affordable home to buy. Breaking down the detailed numbers will help you make a wiser financial decision.

  1. Check your Credit Score

One of the first things your lender is going to do when checking to see if you are a good candidate to buy a home is to check your credit score. The better your credit score, the better your interest rate will be. It is among the most important factors when it comes to your lender approving you for a loan or not. The better the credit you have, the better the loan percentage you can receive. There are a number of websites available to you to check to see where your credit score is at.

Damaged Credit?

If you have damaged credit, the best thing you can do is to give it time. Find ways to pay back lenders as soon as possible, and work to find yourself as debt free as possible.

Wrapping Up

Buying a home for the first time or even the third time and beyond is a stressful experience. Having your finances in order and understanding the process are important steps. When you break down all the specific costs and understand how much you feel comfortable affording, how much a home actually costs, and what your credit score is at, you will be able to make a wise financial decision.