Plan your 2021 taxes now—or else.
Preparation means more than just saving for a down payment and calculating what you can afford—though those are crucial steps. It also means buffing your credit score and thinking seriously about whether this is the right time in your life to buy. Here are five steps to take.
Assess Career And Other Plans
Some call it the Great Resignation. Others the Big Quit. Whatever you call it, the percentage of U.S. workers voluntarily leaving their jobs reached a record high in August as job openings remained near their all-time high. So before you fixate on buying now, think about whether you’re likely to be moving to a new city soon for a better position or lifestyle, or perhaps returning to school to advance or change your career.
When you purchase a home, you pay closing costs and other transaction fees that might be as much as 5% of its value. If you then decide to sell it the following year, that’s a lot of money you’ll never see again—particularly if the recent surge in home prices ends. A rule of thumb is that you should plan to own a home for at least five years to justify both the closing costs on the front end and the selling costs on the back end.
Of course, there’s more to your life than work. Are you planning to start a family in the next few years? If so, buying that one-bedroom condo you can afford now may not make sense. So, with the understanding that life can be unpredictable, take your career and other plans into consideration before deciding to buy a house now.
Start Saving In A Roth IRA
Even if you decide to delay that first purchase, start saving now for a down payment. The best way to achieve significant goals is to break them down into smaller targets and chip away at them consistently—and saving for your first home is one big goal.
In addition to creating a budget and setting money aside every month, leverage the benefits of a Roth IRA. These accounts were designed for retirement savings, but since your contributions are made after tax, they can be withdrawn at any time, without taxes or penalties, for any purpose—meaning you can take your money out for a down payment, for grad school or for an emergency. As for the earnings in a Roth, once you’ve held the account for five years, you can withdraw up to $10,000 of those gains to buy your first home, also without paying taxes or the 10% early withdrawal penalty.
Keep in mind that if you plan to tap your Roth for a house, you should still be saving for retirement in a 401(k) or other retirement account. And if you ultimately decide not to buy a home or end up getting your down payment from another source (say, from an inheritance, a gift or other savings), your Roth can continue growing tax free for retirement.
Your credit score is also used to determine whether you qualify for a loan and—this is crucial—for the lowest interest rates. That means a high score can save you thousands over the life of a mortgage. To boost your score, make sure not to miss any credit payments, since payment history is the most significant component of your score. (A smart way to make sure payments are on time is to automate them.)
Paying down your credit card balances before applying for a mortgage can also help, since your “credit utilization”—meaning the percentage of your available credit card lines you’re using—is a significant factor in your score. Using less of your available credit signals that you are not relying on debt to fund your lifestyle.
Run Some Numbers
Meanwhile, review your detailed credit bureau reports to ferret out any inaccuracies or fraudulent accounts. You can view your official credit reports online for free without the need to enter any credit card or payment information.
Another approach: Tap into your networks to get a recommendation for a mortgage broker—someone who can rerun your numbers and help you sort through the often-confusing mortgage options. “It is critical to understand what purchase price you are qualified for so that you can narrow down your search and not waste your valuable time,” says Judith Weiniger, who runs her own independent realty firm in central New Jersey.
But in today’s hot housing market, simply understanding what you should qualify for isn’t enough. Before you begin serious home-shopping, you’ll likely want to get preapproved for a mortgage, since potential sellers might not take you seriously if you don’t have financing lined up. Note that preapprovals are typically good only for 60 to 90 days.
By Camilo Maldonado, Forbes Money Team
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