For years, you have been dreaming about buying your first home and now you are debating taking action. Are you ready to enter the home buying market? Consider these seven signs before taking the plunge.
1. Having Job Security – Mortgage loan approvals require a steady regular income. Is your employment situation secure enough that you can commit to buying a home? Being out of work is bad enough, but being out of work with a brand new mortgage is disastrous.
2. Commitment to the Area – Generally, realtors recommend that you plan to stay in a home for a minimum of five to seven years. If your situation is still fluid, buying may not be for you. Buying a home is a long process, and you do not want to have to sell one in a rush soon after a purchase. Most of your payments are going to interest in the early years, so you will have built up very little equity.
3. Having Low Debt – Lenders will assess your ability to repay by looking at your monthly debt-to-income ratio (DTI) in two ways: the front-end DTI which only includes housing debts and expenses, and your back-end DTI that includes all debts, such as car payments, credit cards, and other loans. Lenders vary in their limits, but a typical upper end is 35% for a front-end DTI and 43% for a back-end DTI. If you want to consolidate your debt, try the free Debt Optimizer by MoneyTips.
4. Knowing What You Want and What You Can Afford – Those two things usually diverge. You have probably thought about all of your preferences in a home, but take the time to rank them. If you determine that you cannot afford the home of your dreams, what compromises are you willing to make? Would you rather continue to save and hold out for a dream home? Set your home purchasing priorities before shopping to avoid making spur-of-the-moment decisions.
5. Budgeting Skills – Do you have a budget and how well do you stick to it? If you do not have a budget at all, start there before even considering a home purchase. If you have one, but have a hard time sticking to your monthly allocations, work on your spending habits and saving skills — because it will only get more difficult after you buy a home. There are many unseen expenses ready to catch you off-guard.
6. Available Down Payment – The standard for a down payment is 20% of the cost of the home. Do you have that much in available cash without neglecting your other home expenses? If not, you should consider waiting and saving for a future purchase, unless housing prices and interest rates are rising so rapidly that you may miss your opportunity.
Loans are still available with down payments below 20%, especially through programs such as FHA loans that assume part of the risk for banks. However, you will normally need to pay private mortgage insurance (PMI) with lower down payments, adding to the overall debt and monthly payments. Do a thorough calculation of the expenses to understand whether you can truly afford a home right now.
7. Prepared for Maintenance – Do you have a true understanding of the maintenance involved in homeownership? There is much more to it than just mowing the lawn. Changing filters, fixing leaks or clogs, painting, simple drywall repairs, clearing gutters… the list goes on. Make sure that you understand the limits of your handyman skills and budget in repairs for the things you cannot handle. A good rule of thumb is to save 1%-3% of a home’s purchase price annually for repairs and maintenance.
If none of these aspects give you concern, then congratulations! You are likely ready to become a homeowner. With preparation, you are now ready for a smooth home buying experience, leading to happy and responsible homeownership. Now would be a good time to look at our articles on borrowing!
If you are interested in refinancing your home loan, visit the MoneyTips Mortgage Planner.