Purchasing residential property and finally being able to own your own home is a dream come true for many people. But no matter how excited you are about the prospect of buying a home, or even when you think you’re ready, certain financial factors and money habits can keep you from getting to that point. At the very least, it can add months or even years to your home buying timeline.
What GOBankingRates recently talked about Erin Hiebert, a Louisiana licensed real estate agent. Nicole Beauchamp, Licensed Associate Real Estate Broker Engel & Völkersand real estate agent Scott Bergman. Realty ONE Group Sterlingabout the main economic factors that prevent people from buying a home.
Here’s what they said:
Lifestyle inflation and the debt trap
“The two barriers to homeownership that prevent people from owning a home are ‘lifestyle inflation’ and ‘debt trap,'” Hiebert said.
Lifestyle inflation is basically when your paycheck increases and you start spending more money. Or, as Hiebert puts it, “When your salary increases, you want to upgrade your car or take a vacation instead of saving up for your financial goals.”
Debt trap is also a big problem that delays homeownership.
“And then there’s the debt trap, where you borrow for today for instant gratification at the expense of your future,” Hiebert says. “The world loves touting zero interest rates and small monthly payments on non-essential items. When these small monthly payments add up, you end up in more debt.”
The more debt you have, the harder it is to find a lender who will work with you to give you the best interest rate on your mortgage. Additionally, the more debt you have, the less money you have for a down payment and other initial costs when buying a home.
lack of communication
If you’re buying a home with your partner, communication is essential to make sure you’re both on the same page and can realistically afford it. However, many people skip this step or don’t have solid communication skills, which delays their home buying journey.
“Communication is key when discussing money for any couple,” says Hiebert. “One of the best ways to make financial decisions easier is to ask yourself before splurging on the latest smartphone or luxury vacation whether this purchase aligns with your long-term goals. Giving yourself a ‘wait and think’ period before making a big purchase can add valuable perspective and help you avoid impulse purchases.”
How long to wait should be determined based on what is best for both parties. This could take him a week or a year. In either case, it’s important to be clear and realistic about your expectations and goals.
low credit rating
Your personal credit score and history can go a long way in determining whether you qualify for a mortgage. The higher your credit score, the higher your chances of approval and interest rate. While a good credit score may mean you’ll be approved for a larger loan, it’s important to make sure you can realistically afford any type of loan.
Unfortunately, many people ignore their credit score. As a result, when you try to apply for a loan, the conditions may not be met or you may only receive a loan for a smaller amount than you need.
“My number one tip is to check your credit score often, because it’s like taking your financial pulse,” Bergman says. “This is the best way to constantly monitor the health of your household finances.”
lack of financial preparedness
In addition to your credit, your income and savings are also very important when determining whether you’re ready to buy a home or whether you might delay buying a home.
“One of the main things that prevents people from owning a home is not being financially ready to own a home,” Beacham said. “In some cases, this means they don’t have good credit or don’t have enough credit. [savings] for down payment and closing costs. ”
If you don’t have enough money to manage your monthly mortgage payments, or at least haven’t saved up a minimum down payment, you may not be able to buy a home when you want to. However, that doesn’t mean it’s impossible.
“in some cases, [poor credit and insufficient savings] It keeps people on their rental bikes,” Beauchamp said. “However, creative financing options may be available to buyers.” [their] You can make purchases or look at ways to improve your credit. [they can] They borrow (at a higher cost) because of their credit profile. ”
Account in collection
Having an account in collections can have a significant impact on your credit score and make it difficult to qualify for a loan.
“First and foremost, one of the worst financial habits is not closing or resolving accounts in collections,” Bergman said. “I always advise my clients to: [in] A collection is much like an open wound and will continue to bleed until it closes. ”
Closing your account increases your chances of getting a mortgage.
“An unresolved collection account is one of the worst things that can happen to your credit history, but if you have a high credit score and close the account, most banks won’t approve, even if you’ve had a faction account in the past. “I’m sure they will,” Bergman said. .
There are two different ways to resolve open accounts in a collection.
“One, of course, is to pay in full, which is obviously the preferred method, but it can be difficult,” Bergman said. “However, you also have the option of negotiating a settlement amount, typically 60 to 70% of the total account balance. Ensuring that an open collection account is closed by paying it in full or liquidating it will save you a lot of money in the long run. could bring benefits.”
Keep in mind that settled accounts will still appear on your credit report and will lower your credit score. But once you resolve your debt, you can start working on getting your score back on track and increasing your chances of approval for future loans.
high credit utilization
Another important factor that not only slows people down from buying a home, but also lowers their credit score, is their credit utilization ratio. This is basically a percentage of your available credit. The more credit you use, the harder it will be to get approved for a loan.
One financial habit that can lead to high credit utilization is credit card fraud.
“Credit utilization is very important, so make sure your utilization ratio doesn’t exceed 30%, especially when you’re trying to apply for a loan,” says Bergman. “Banks usually don’t care about credit card usage as long as loan applicants use credit cards responsibly.”
lack of financial education
Even if you have good credit and a steady income, you need to prioritize your own financial education when making a big decision like buying a home. Otherwise, you could be blindsided by the real costs and commitments of homeownership.
“Couples should also learn about finances, budgeting, and debt in general together,” Hiebert says. “Learn the difference between constructive debt that can improve your financial situation, like a mortgage or education, and destructive debt that diminishes in value and adds no value, like a credit card or personal loan. ”
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