Owning a home is a dream that many aspire to accomplish, but some may assume it’s a goal that is out of their reach. This is especially true thanks to a variety of financial burdens such as student loans, medical and credit card debt, and other bills.
Before you start searching the internet for your dream home, you need to evaluate your situation to help ensure you are ready, both financially and mentally, for home ownership. Buying a home is a long journey, so being ready for the process from the getgo can prevent stress and frustration. Here’s what you should keep in mind when deciding on whether or not you are ready to buy a house.
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Financial Stability
Buying a home is a long term financial obligation. Yes, you can potentially get out of it by selling the home, but it’s not like renting an apartment, where you can leave once the lease is up. It is your responsibility to make sure you choose a mortgage that you can afford, meaning you can make payments on time.
So, before buying a home, you need to ensure you are financially stable. The biggest part of that is having a steady income from your job, and ensuring your job security in the foreseeable future.
Most mortgage lenders will inquire about how long a person has been at a job, and will even go as far as researching what kind of turnover that career typically has. If you are self employed, you’ll need to prove, both to yourself and lenders, that your business is stable and can provide a long-term income.
Debt-to-Income Ratio
Before deciding to take on the extra debt of a mortgage, you need to make sure that you have a good handle on any existing debt. To figure that out, add up all of the monthly payments you make on current debts and then compare it to your monthly income.
Typically, lenders won’t go over a 43% debt-to-income ratio when considering a mortgage loan. That 43% includes how much you would be paying for the mortgage loan, alongside other debts you might have. Common debts people have include car payments, outstanding credit card payments, and student debt. It may be wise to look into different first-time home buyer programs that specialize in helping first-time home buyers handle these situations.
The lower your debt-to-income ratio, the higher the chances of qualifying for a loan and better interest rates. If you have a substantially high ratio, it might be worth putting off buying a home and instead focusing on paying off current debts.
Having a low debt-to-income ratio might not be the best personal indicator that you are ready, though. All this number takes into account is outstanding debt, not regular bills like utilities, food, clothes, or other expenses.
Credit Score
A credit score is a way for companies to measure how reliable and financially stable a person is. There are many factors that go into your credit score number, for example, whether or not you make payments on time to certain bills and the number of credit lines you have open. Many companies that measure credit scores, each with their own qualifications, look for individuals with an average credit score in the 600s.
A lower credit score could lead to difficulties obtaining a mortgage loan, or result in unfavorable interest rates. Some lenders might even reject an applicant completely because of a low credit score. On the other hand, a high credit score could lead to lower interest rates, or benefits like not having to supply a down payment.
It’s possible to check your credit score through your bank or contacting the credit bureaus directly. If you do have a lower credit score, you can improve in a variety of ways such as setting up automatic payments and increasing the amount you pay on your debt each month, to increase your chances of receiving the benefits that are often associated with good credit.
Down Payment
How much you have saved up for a down payment will play a large role in buying a home. Being able to provide a good down payment can help lower your total monthly payments, and can have an impact on how much interest you must pay in the long run.
Some mortgage lenders require 3% of the total value of a home as a down payment, but might require an even larger amount if a person has poor credit. People with poor credit might have to make a 5%, 10%, or even 20% down payment. Conversely, people with excellent credit might be able to do away with a down payment entirely in exchange for higher monthly payments.
Consider Extra Payments, Fees and Taxes
There is more to buying a house than just monthly payments on the mortgage loan. There are additional taxes, fees that have to be paid during the buying process, and regular payments to organizations such as a Homeowners Association (HOA), if your neighborhood is a part of one.
As you budget out to see if you can afford a home, don’t forget to include these additional costs. While these fees are generally smaller and won’t dissuade you from buying a home, they can be a nasty surprise if they aren’t expected. Be sure that before you start the home buying process, you have enough cash available to pay for any fees that might arise. This might ultimately mean putting off looking for a home another month so you can save accordingly.
Are You Ready to Settle Down?
Buying a home is traditionally a longer term obligation and investment. Ask yourself if you’re ready to purchase a home, instead of renting, and take into consideration everything that comes along with doing so.
Buying a home means staying in an area for a longer amount of time, whereas renting a home makes it easier to move after the lease is up. If you are happy with the town or city you are currently living in, then purchasing a home in the area may be what you need. If not, you may want to reevaluate what would be best for you.
Home Maintenance
Buying a home isn’t just a monetary investment, it’s a time investment too. When you rent a place and something breaks, you can call upon the landlord to fix it. If something breaks in your home that you have purchased, it falls to you to repair it.
Owning a home requires you to do quite a bit of maintenance. This includes taking care of your lawn, shoveling the driveway if it snows, and even tasks that may be missed such as changing air filters.
A lot of your time may be spent on home maintenance and repairs. Assess whether this is doable for you, and whether such a lifestyle fits your finances and your schedule. It is important to keep in mind that investing into your home by making repairs and renovations may pay off in the end by increasing your home’s value — making it worth more now than when it was first purchased.
Don’t Cave Into the Pressures of Buying a Home
Ask yourself — do you actually want to buy a home, or are you only doing it because it’s expected of you? Are your parents pressuring you to move on to the “next big stage of life?” Buying a home is a big responsibility, and if you don’t want it, there is nothing wrong with that.
But if you do want it, if you are passionate about owning a home, know that it is possible. Just make sure that everything is in order before you jump in . This includes your credit, finances, income, and mentality.
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