Buying A Home Can Take a Toll On Your Credit Score, Financial Experts Warn
It’s the American dream—but it can turn into a nightmare for your credit score if you’re not careful. Financial experts at Take Charge America warn that buying a home when you’re not truly prepared for the responsibility you’re taking on can lead to financial stress and a lowered credit score.
“Jumping into home ownership unprepared can be the start of a financial downfall,” says Mike Sullivan, a personal finance consultant with the nonprofit credit counseling agency. He cautions that owning a home means more than simply paying for mortgage and utilities each month. “New homeowners should conduct research to ensure they are financially prepared,” he advises.
This means calculating the true cost of owning a home, including the cost of maintenance, property taxes, insurance, homeowners’ association fees, landscaping, and moving.
It’s also vital to look at your overall financial health before committing to buying a home. It’s not wise to put all your savings into a down payment, leaving nothing leftover for emergencies down the road. If you have debt, bad credit, or trouble managing your money, it’s best to resolve that before buying a home.
What to know when buying a home
Another common pitfall is spending more than you can afford, and ending up “house poor.” That’s what it’s called when your mortgage, insurance, and other housing-related costs take over your budget, leaving little room for anything else. Sullivan says your house payment should not be more than a third of your income, and that when coupled with your other debts, it should not exceed 40 percent of your total income. There are many financial calculators available online to help you figure out how much house you can really afford.
Cleaning up your credit score, paying down debt, and getting pre-approved for a mortgage are all excellent things to do when preparing to buy a home. Being pre-approved is easier when you have good credit and low or no debt, and puts you at a distinct advantage when you’re ready to make an offer on a home. During this time, it’s wise to avoid opening new lines of credit, applying for new credit cards or loans, or switching jobs.
Buying a home can be a dream and not a nightmare, provided you go about it armed with information and are prepared for the responsibility.