Is your head in the clouds dreaming about what your life could look like? Take a step back and let’s figure out where we are so we can get directions to where we want to be!
The first step to getting where you want to be is to figure out where you are. Here’s how:
Find out your credit score. Go to annualcreditreport.com, the only source for free credit reports authorized by federal law. You can currently get one free report weekly from each of the three major credit bureaus. Lenders use this score to determine your viability as a borrower. Here’s more information if you need to improve your credit score.
Calculate your DTI. Your DTI (debt-to-income ratio) is important to understand if you are financing the purchase of a home. DTI shows the percent of your income that you are using to pay your bills. Divide your monthly debts by your monthly income. For example, if you make $6,000 per month and have $3,000 in monthly debts, that’s a DTI of 50%. Most lenders like to see a DTI below 35% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
Current Cash on Hand or Cash Equivalents (CCE). How much cash money do you have? Do you have a savings account, certificates of deposit, or other assets that you can quickly access if needed? If the answer is none, you may want to look at establishing an emergency savings account first. This is a huge psychological step for many people when they realize they CAN save money and begin to rely less on borrowing money for emergencies. How much can you save per week? $100? $1,000? Start with $10 a week if you have to. You’ll establish an emergency savings in no time and a year later you’ll thank yourself.
Increase Your Earnings and Cut Spending. How much money do you bring home each month and where does it go? What gets measured gets managed! Find a budget that you can follow to measure income and spending. I like the 50/30/20 Budget, it’s easy for me to follow. Once I was able to see where I was I was able to make changes to get to where I wanted to be. There’s a ton of advice on the internet. Find a path that works for you and KEEP GOING. Don’t give up on yourself.
The housing market may seem challenging today, but if you ignore the latest headlines and learn how other home owners took their first steps to home ownership, you can find your own path to purchasing your first home.