Entrepreneurs have many aims, and outside of business success, the goal of home ownership is a widely held and admirable example. Even mega-moguls have mortgages on properties, so if you are still on the road to this point, getting your home loan is a necessity. In this post, let’s take a look at how smart financial planning can push you along this path faster.
Begin with a Budget Assessment
Knowing your financial limits is the first step to take before you start mortgage application processes in earnest. To do this, break down monthly income and expenses to understand what you can afford.
You should:
- List fixed costs (rent, utilities).
- Track variable expenses (groceries, entertainment).
- Factor in irregular costs (car repairs).
This gives a clear view of available funds for mortgage payments. Given that entrepreneurs often have a less stable income than other homebuyers, you also need to plan for the unexpected. Set aside an emergency fund, saving 3 to 6 months’ worth of living expenses as a hedge against sudden financial hits like medical bills or business hiccups.
Also, stay realistic with your home price range. Aiming for your dream home if it’s definitely outside of what you can afford in repayments is not sensible.
As time passes, regularly revisit and adjust your budget as needed. Financial conditions change, and so should your plans. This lets you go into applying for a mortgage with your eyes open.
Continue with Credit Score Improvements
A strong credit score opens doors. Review your credit report for errors and dispute any inaccuracies. Every point counts when applying for a mortgage, and with $20.2 trillion in mortgage debt racked up nationally, you need to make sure your slice of this is minimal.
For starters, pay bills on time. Consistent payments build trust with lenders. To make this easier:
- Set up automatic payments.
- Remind yourself of due dates via calendar alerts.
Moreover, reducing outstanding debt is a must. High balances can negatively impact your score. Aim to:
- Pay down high-interest debts first.
- Avoid maxing out credit cards, and ideally keep usage below 30% of the limit.
Also, don’t apply for new credit before getting a mortgage. Each inquiry can temporarily lower your score and raise red flags for lenders.
Finally, consider working with a financial advisor or using tools like Experian Boost, which includes utilities and phone bill payments in your history to potentially lift scores in a flash. There are still options available if your score is low, but a mortgage will be very hard to get approved for, so hold off until it begins to rise.
Save Towards a Down Payment
Another milestone on the journey to securing a mortgage is getting together enough cash for a down payment. This is all about saving money over time and is a good practice for any entrepreneur even if buying a home isn’t currently on the cards.
Start by setting clear savings goals. Know the percentage required for your desired down payment, which is typically 20% to avoid the need for private mortgage insurance (PMI).
Then, automate your savings. Transfer a fixed amount from each paycheck into a dedicated account. To maximize this you can also:
- Use high-yield savings accounts.
- Explore certificates of deposit (CDs) for better interest rates.
At the moment the average person is putting 3.4% of their income into savings accounts, which is less than ideal to establish a down payment swiftly. So if your nest egg is not ramping up as quickly as you’d like, cut discretionary spending. Small changes add up quickly. For instance, you can:
- Cook more at home instead of dining out.
- Cancel unused subscriptions or memberships.
As an entrepreneur, you can also seek additional income streams. Side gigs or freelance work can boost savings without altering your primary budget drastically.
Lastly, always leverage any financial windfalls wisely. Tax refunds, bonuses, and gifts should go straight to your down payment fund instead of splurge spending.
Understanding Loan Terms and Conditions
To plan out your finances ahead of applying for a mortgage, you also need to be up to speed with the terms of home loans. Unsurprisingly you’ll find that different loans come with varied conditions affecting your financial future.
Interest rates matter. Fixed-rate mortgages offer stable payments, while adjustable-rate mortgages (ARMs) can start low but fluctuate over time. You need to:
- Consider long-term costs.
- Understand rate caps on ARMs to avoid surprises.
Also bear in mind that loan term lengths impact monthly payments and total interest paid. Shorter terms mean higher monthly costs but less interest overall, while longer terms lower immediate payments at the expense of paying more interest over time.
Prepayment penalties could cost you if you pay off the loan early or refinance before a certain period. Always check for these clauses.
Finally, review closing costs like appraisal fees, title insurance, and other miscellaneous charges which can add up significantly.
The Last Word
In short, hammering your finances into shape before applying for a mortgage will leave you closer to homeownership than ever. It is also good practice for getting money management right in a business context, so it’s doubly worth doing.
The post How Smart Financial Planning Can Simplify Your Mortgage Journey appeared first on thekickassentrepreneur.com