4 Steps to Prepare for a Big Purchase
A financial journey is filled with challenges such as budgeting, saving, and managing debt, often accompanied by unexpected income fluctuations. Whether it's the milestone of buying a home or a car, these four crucial financial steps can guide you toward your destination.
1. Look at your financial picture
Start by considering what you can afford given your current income, expenses, and other debt obligations. Get a handle on how much money comes into your household each month, and where the money goes. Consider your net income- what is available to you after taxes.
For homebuyers: When purchasing a home, a common rule of thumb is to spend about 30% of your monthly gross income on housing. That includes costs like mortgage principal and interest, property taxes, insurance, and maintenance.
2. Verify your credit score and report
Utilizing our My Credit Score tool, you can assess your current credit score and utilize the score simulator to experiment with scenarios, gauging how paying off debts or taking on new ones impacts your score. Obtain your credit report through AnnualCreditReport.com and adhere to the provided instructions to access your existing credit score, as it significantly impacts the financing costs for your purchase. A lower credit score is correlated with a higher likelihood of encountering elevated interest rates and increased overall expenses.
Tip: Be sure to check your report for accuracy. Resolving errors or incorrect information often helps increase your credit score, giving you more attractive financing options. If the report is inaccurate, file a dispute with the credit bureau.
3. Research your financing options
For a home purchase, that means giving yourself enough time to explore mortgage options including types of mortgages, terms, fees, interest rates, and other information. Consider getting a preapproval or prequalification letter from a lender, especially in a competitive market with low housing inventory.
4. Make the deposit
Finally, get ready to make an earnest money deposit for your purchase. In the case of a home purchase, it indicates you are a serious buyer. Generally, earnest money deposits range from 1% to 2% of a home’s purchase price and are only refundable under specific circumstances.
For a new car purchase, deposits typically total about $500 once you agree to the vehicle price in writing.
The Journey Ahead
Remember, thorough research and careful consideration of your financing choices are crucial before making significant purchases. These steps will help you navigate the financial journey and make informed decisions that align with your broader financial goals.
From the experts at GreenPath Financial Wellness