For many people, managing personal finances can be daunting. The purpose of this post is to give you a basic understanding of how to start preparing youself to become a homeowner. Some of these suggestions may seem obvious, however many of us don’t have much “cents” when it comes to personal finances, financial freedom, and exactly what it takes to become a homeowner.
1. Get a Job…or, Steady and Traceable Income
Getting pre-approved as a W2 employee is easier but that doesn’t make it impossible for entrepreneurs. As a W2 employee, you’ll be responsible for supplying 2-3 of your most recent paystubs and your employment will be verified so you might want to gauge who the best contact might be within your company to speak to for verification purposes. If possible, you might even want to give them a heads up. Having this information early during the pre-approval will be helpful. COVID-19 has added some additional verification steps. Ultimately, your employer may be required to confirm your employment’s longevity. For example, if you were to relocate, would your job be transferable.
Purchasing a home as an entrepreneur is absolutely possible! You’ll want to make sure you have your paperwork in order – for example, it will become important that you’ve filed your taxes, balanced your profit and losses , and documented that in a profit and loss statement. You may also be required to verify the longevity of your service/business during the Pandemic/COVID-19. For example, prove that you are “still open.”
2. Prepare Your Tax Returns
Tax returns are key to determining your income over a period of time. Particularly for entrepreneurs, you may want to make some temporary adjustments in order to qualify for a certain amount, but be cautious – you may be required to take on higher tax liabilities. Typically any lender requires your last two years of W2s.
3. Monitor Your Credit Score
Many of the larger purchases we make in life will require credit. Having poor credit costs you money – in fact, it can cost you thousands in interest. Ultimately, good credit will get you the best possible financing terms. An easy way to build credit is to get a credit card, use it often, pay it off every 30-days, and do not miss a payment.
Did You Know? We have an in-house credit-repair partner that can help you get rid of inquiries, remove “bad” accounts (for example, repossessions, evictions, etc.), etc.
4. Monitor Your Debt
One factor that is ~30% of your credit score is your credit utilization rate. This is essentially the percentage of your credit limit that you use (Example: if your credit limit is $10,000, but you spend $8,000 — your credit utilization rate would be 80%). You should aim to keep your utilization rate under 30% – 10% if you’re financially savvy.
The Difference Between Good Debt and Bad Debt
4. Review Bank Statements for “Red Flags”
5. Create a Budget
6. Create an Emergency Fund…and Create Reserves
An emergency fund is just that, a bucket of money that you can dip into in case of emergencies. Reserves is basically money that you have saved that could help you with the mortgage payment, down payment, or any costs associated with owning a home. Now, I’m not an expert in this department but I can tell you what steps I’ve taken to keep a savings account, emergency fund and investment accounts. I followed Dave Ramsey’s advice on the emergency fund. Typically an emergency fund might cost a few thousand or less so first I established an emergency fund of about $3k that I don’t touch. For savings account, I’ve heard about high-yielding accounts – typically savings accounts don’t really