Buying a house is one of the biggest financial decisions you’ll ever make. It can also be game-changing in how you think about money.
Getting ready to buy your first home instantly changes your finances. You’re finding ways to save up for a down payment, which might mean thinking more carefully about how you spend your money. You’re cautious about opening new credit lines because you want your credit score to remain intact. You may even try making a budget for the very first time!
All of these are good habits to form, and they shouldn’t go away once you buy your home. But you might see a few other financial changes once you do say “I Do!” to your dream home.
Prepare for a credit score drop.
Lenders will check your credit score as part of the mortgage application process. This results in a hard inquiry against your credit score. Once the paperwork is finalized and you have your mortgage in hand, your credit score is going to go down — regardless of what it was to begin with.
That’s because you’ve taken out a loan and your debt has increased. Debt-to-income and credit utilization affect your score. Your mortgage is a new credit account, so it decreases the average age of all of your credit accounts, which can bring down your score.
The good news is that as long as you make your monthly mortgage payments on time, your mortgage can help you increase your score over time. Credit mix — the various types of credit lines you have — is another factor that influences your score. Adding a mortgage loan to your existing credit cards, auto loans, and installment loans improves your credit mix, which can help you grow your score.
Your monthly living expenses go up.
Renters have their fair share of living expenses every month: rent, renter’s insurance, utilities, and maybe a cable or satellite bill. When you’re a homeowner, you’ll have a few more line items to budget for each month.
All costs are on you. If your landlord was paying for trash pickup, for instance, you’ll have to foot the bill from now on. If your landlord fixed a leaky faucet, replaced a broken oven, or had your front door rekeyed, those are all up to you now.
Homeowners need to budget for home maintenance and upkeep, as well as improvements to the home to grow or maintain its value. Things like lawn care, pest control, air filters, HVAC Light tuneups, light bulbs, and septic care are also added to the list. In addition to paying for homeowner’s insurance compared to renter’s insurance, you’ll also pay annual property taxes and possibly homeowner’s association (HOA) fees.
Buying a home is an expense that keeps growing even after you pay off your mortgage. Make sure you don’t underestimate just how much it will cost you to live in your new home. Whatever your project, it’s a good idea to pad that budget by a few hundred dollars, just in case.
Saving will be more important than ever.
When you have more expenses as a homeowner, managing your money becomes a much higher priority. Granted, that probably mattered to you before. But having more expenses gives you less wiggle room and less room for error.
Not having much in a savings account when you’re a homeowner is a major risk. If something serious were to happen, such as the water heater tank exploding or a tree collapsing your roof, you’ll need some funds to cover whatever insurance doesn't cover it. You may also need immediate cash to help you get by while you wait for reimbursement. Some issues, such as an appliance breakdown, won’t be covered by insurance at all!
Many almost-homeowners make the mistake of saving up for a down payment, then wiping out their entire savings account to buy their home. Ideally, you will save up more than what you need for a down payment so you can keep plenty of cash for yourself in case of an emergency.
To do this, you might want to explore home mortgages that don’t require 20% down. For instance, an FHA loan requires just 3.5% of the home’s final sale price, whereas a conventional mortgage will require 20%.
A good goal is to keep 3-6 months of expenses in a savings account. This can hold you over in the event of a job loss or major event.
Adopt a Budget Mindset
The bottom line is that every dollar and every expense matters more when you become a homeowner — or are even thinking about home ownership. Good budgeting can help you keep tabs on your money, cut unnecessary expenses, and reduce spending so that you have more cash in your stash.
My free course, Master Your Money — Get Your Budget On! can help you get your finances on track and help you move closer to your home dreams. Sign up free today!