With inventory levels high across the country, sellers desperate to move, and interest rates at an all time low the question begs at many people,
Can I afford to buy a home now?
Before seeking a mortgage or spending your life savings make sure you are ready to make a great investment that will make your life more comfortable. When preparing to purchase property there are a few things that must be considered.
How long will you own the home?
The first few years of mortgage payments mostly go toward paying off the interest on the mortgage. Due to this, paired with transaction fees it often doesn’t make financial sense to spend all of that money unless you will own the home for at least five to seven years.
Can you comfortably afford the payments associated with homeownership?
As well as having to pay utilities, insurance, property taxes, and in many cases assessments, home owners also have to pay for all maintenance. Some maintenance costs are routine and some are pretty inexpensive, stil others may come as a surprise. Depending on the home you buy you may not have a choice in how to make a repair. For example, the door to our condo warped with age and needed to be replaced. Since the door must match all of the others in the hallway the only choice we had was to buy a new one through the management and pay the amount they charge. On the other hand when the disposal hit its last leg we were able to go to the store, pick one of our choosing, and replace it ourselves.
Take careful consideration of the age of the home and appliances in it. Understand the age of each and what their average life expectancy is so you can gauge when maintenance might be needed and how much that will entail.
Will you still have six to twelve months of savings in case of an emergency?
Life happens. Homes need maintenance, people need maintenance, bank accounts need maintenance. It is always a good idea to keep at least six months of savings for an emergency. No one can predict when someone will fall ill, something will require more maintenance than expected, babies will be conceived, or jobs change. Sometimes life happens very fast. Stay prepared.
Your lender will look at three things to determine if you qualify for a loan and how much money you can borrow.
- Is your credit history clean and strong?
There are plenty of tools to help you check your credit score and make sure there aren’t any surprises on it. Just remember that every time your credit is checked it is noted and checking it too often can have a negative effect. Making large purchases before buying a home can also have a negative effect to your lender. If possible wait until the home closes before buying furniture, a new car, or any other large purchase. If you can’t wait speak with your lender about it first. Open communication is always welcome.
- How much income do you bring in each month?
Lenders use a percentage to determine how much home a client can afford. They don’t care about your individual expenses. The standard percent of income that housing expenses should not exceed is 28%. Housing expenses, by this definition, include mortgage payments, taxes, and insurance. You, as the homeowner, should be able to cover all of the rest of your living expenses from the remaining 72% of your pre-tax income.
Your lender may offer you the opportunity to have a higher housing expense than 28%. Just be sure that you know how much you are comfortable with. If he offers you a 36% ratio, but you like to wine and dine accepting that mortgage amount might not leave you enough spending money to entertain to the extravagance you prefer.
When my husband and I first bought our home we were shocked at how much of a mortgage the lender determined we could afford. We knew that, being very social creatures, if we took all that they determined we could afford we would feel very house poor. It’s vital to understand how much you need to spend and how much you choose to spend per month before deciding how much home you can comfortably afford.
- How much money will you put down on the home?
Your downpayment helps determine what kind of loan you will qualify for. It also gives the lender a sense of how well you manage money. It’s very hard for most people to save 20% of the property value they would like to buy. The more financial savvy you can show your lender you are with a strong down payment the less your lender will see you as a risk and the happier he will be to write you a loan. There are FHA government insured loans that accept lesser down payments (minimum 3.5%) and are more flexible with debt ratios.
To gain sense of how large of a loan you might qualify for use or pre-qualification calculator.
For a sense of how much your mortgage payments might be use our payment calculator.
Please contact Vito Roppo for more information about available mortgage products and to prepare yourself for your next home purchase:
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Special thanks to Vito Roppo, guest editor of this post.