Are you truly ready for the biggest purchase of your life?
Aside from marriage and having children, buying a house is one of the biggest commitments of your life
Homeownership is the largest financial decision most people will ever make. There are many things to consider and questions to ask yourself before signing that 30-year commitment
We look at the questions you need to ask yourself so you can better understand if you are ready to buy a home.
How Good is Your Credit Score?
Unless you have cash to purchase your new home outright, your credit score or FICO is the most important factor when buying a home.
You don’t need perfect credit to qualify for a mortgage, but having good to excellent credit will provide for better loan terms.
You could even qualify for a loan with a 600 credit score.
However, before you start looking for a loan, it is a great idea to do everything you can to improve your credit score. With a higher credit score, you will find it easier to get a mortgage, and the terms of the loan will be better.
I recommend going to Experian to monitor your credit and even use features to improve your credit score.
Do You Have Money Saved for a Down Payment?
One of the main reasons people save money is to eventually purchase a house. Aside from a few government loan programs that allow a 0% down payment, you’ll need to put some money down to buy a home.
Putting more down on a home purchase has many potential benefits:
- lower interest rates
- no PMI (mortgage insurance)
- lower monthly payment
- paying less interest over the life of the loan
- overall better loan terms
20% or more down payment will get you the best interest rates and lower fees.
Depending on the type of mortgage you are looking at, you could afford to buy a home with only 3% and 5% of the purchase price saved for the down payment.
With FHA loans, you are going to need 3.5% as a down payment as a minimum. Though the more you can pay upfront as a down payment, the less interest there is to pay.
Do You Have Money for Closing Costs and Other Expenses?
While the down payment is the biggest fee when buying a home, it isn’t the only fee to worry about.
When you purchase a home, you will have to pay closing fees that include legal fees, taxes, and lender fees, and any other fees negotiated throughout the contract.. These can total between 2% and 5% of the purchase price of the home and have to be paid at closing.
Aside from closing fees, you’ll need to consider other expenses like moving, new furniture, upgrades, repairs, and possible maintenance before moving into your new home.
If you don’t have an emergency fund to cover such expenses, you could find yourself in a lot of trouble before moving in.
Can You Afford the Monthly Expenses of Owning a Home?
You don’t only have to be able to cover the mortgage payments each month, there are other expenses as well. You have to pay your utilities, homeowners association fees, property taxes, and insurance, as well as things like internet and cable.
You need to find out what these expenses will be for the home you are considering buying, and then work out if you can afford them based on your income. If you make a mistake here, you could find you don’t have enough money to cover basic necessities.
Simply using a mortgage calculator won’t take into consideration these extra expenses and could lead to you overextending your finances.
It can appear tempting to stretch your finances to their limit and buy the biggest home you can afford, though it could lead to trouble down the line.
Is Your Income Stable?
It should go without saying, but you should be very confident your income will either be stable or increase over time to pay for your mortgage.
While it is normally impossible to predict losing your job ahead of time, such a situation can result in ending up in foreclosure if you don’t have enough equity to sell.
If you don’t have a stable income, and you have some doubts over whether the money is going to continue coming in, you might be better off waiting until the situation stabilizes for you.
Do You Have An Understanding Of Your Debts?
You don’t need to be completely debt-free to purchase a home, but you do need to understanding the financial load a mortgage can add to outstanding debts.
You need to cover your debt payments along with your mortgage payments, and if this is impossible, you might not be able to get the loan you expect.
Your lender looks at your debt to income ratio, and if your debt to income ratio is 43% or more, you should be fine.
Debt to income ratio can be found by adding up all of your monthly bills and dividing it by your income before taxes are taken out. This doesn’t include debts like your Netflix subscription. Debts like student loans, credit card monthly payments, child support, etc…
This is an indication of how much of your income goes to paying your debts and shows the lender how much you can afford to pay every single month.
Will You Want to Stay in the Property for a Long Time?
Depending on a few factors, usually living in the home for longer is better for your long-term financial situation.
Buying a house to build equity is one of the most effective ways to generate wealth.
While your first home might not be your forever home, you’ll want to make sure the house will meet your needs for 5-10 years. If you aren’t sure about the area you are going to live in, it might be better to wait until you are or find an area that you are happier with.
Is the Home Big Enough?
Space is an important factor, and if you can’t afford to buy a home that meets your needs, perhaps you will be better off waiting.
Are You in the Right Place in Your Life?
Does the idea of settling down seem very scary, or are you ready? If you aren’t confident that you want to remain in the area for at least the next 5 years, perhaps you aren’t ready to settle down.
And if you don’t want to settle down yet, you aren’t really ready to purchase. Making the big leap into the housing market is a massive financial commitment, and you need to make sure you are ready to buy a home. Only you can decide if you are in the right financial, lifestyle, employment, and long-term situation to be ready to buy.
The Most Important Question To Ask Before Buying A Home In Austin, TX
If after going through our questions you still aren’t entirely sure if you’re ready to buy a home, you can always check the financial aspects with your potential lender. A real estate agent can help with more advice if you still have concerns.
One last thing to think about and keep in mind, you will have to pay for housing whether you decide to buy or continue to rent. Sometimes it’s more cost-effective to buy a home. So even if you don’t feel like you’re ready to buy a home it might be the best move, which is why both options should be weighed and investigated.
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