If you feel like it might be the right time to finally buy your first home, your excitement is probably mixed with a bit of apprehension. After all, owning a home is a huge financial commitment, from paying that pricey down payment to keeping up with monthly mortgage bills. And without a landlord to call, you’ll also be taking on a slew of new responsibilities to maintain the home and property (think raking leaves, shoveling snow and fixing leaky sinks). Of course, owning a home can offer many attractive benefits, including increased space and privacy and the ability to build wealth over time.
How can you determine whether you’re ready to take on the responsibilities of homeownership? Here are six key questions you should ask yourself now before buying a home.
Can you cover upfront costs?
Hopefully you’ve been socking away your hard-earned cash over these past few years because you’ll face some expensive upfront costs when purchasing a home. For starters, you should have enough money saved to cover a 20% down payment in order to secure the best possible interest rate on your mortgage and put yourself in the best negotiating position with your lender.
Without 20% for a down payment, you will likely have to pay private mortgage insurance, which can be as much as—or more than—1% of the loan amount [per year]. For example, on a $200,000 loan, private mortgage insurance could increase your payment by more than $150 per month. This will severely impact the mortgage amount in which you will qualify. However, Transparent Mortgage offers special products that can help mitigate the need for mortgage insurance, such as 5% Down 30 Fixed with No Mortgage Insurance (MI).
In addition to the down payment, you should also be prepared to pay for the closing costs, which typically range from 2% to 5% of the purchase price of the home.
Can you afford the mortgage?
It’s easy to fall in love with your dream home, but it’s important to realistically assess whether you’ll be able to afford the mortgage payments each month.
If a person is planning on financing, the first thing he or she should do is contact a mortgage broker to find out how much the bank will loan them. Once that is determined, the purchaser will know what price range they can consider for a potential home.
Based on conventional lending guidelines, you shouldn’t spend more than 28% of your gross monthly income on a mortgage (which should cover principal, interest, taxes and insurance) or 36% of your gross monthly income on a mortgage and other debt (such as a car loan, student loan and credit card debt).For example, an individual earning $48,000 per year will have a gross monthly income of $4,000, and assuming no other debt, would qualify for a monthly mortgage payment of $1,120. However, with other monthly debts such as a $200 car payment, $200 for student loans and $200 for credit cards, it would reduce the amount you qualify for to only $840 per month, which would only qualify you for a mortgage loan of about $110,000. This is especially important for younger home buyers, like the Millennials, to note when getting ready to purchase their first home.
Do you have an emergency fund?
Are you prepared to pay for any unforeseen costs that might arise from owning a home? It’s important to have an emergency fund with about six to nine months of living expenses—just in case. Always expect that there will be problems, delays and costs that are beyond the closing and moving costs.
Can you maintain the home?
Keep in mind that when you switch from renting to owning, you won’t be able to dial up your landlord or building superintendent when things need to be installed or repaired, or when snow piles up on your driveway.
Take into consideration when the house was built as well as the ages of the roof, the appliances, the heating and cooling system and other essential components of the home.
Do you have good credit?
Have you checked your credit score lately? It’s important to know your number because it is one of the factors mortgage lenders will use in determining whether you qualify for a loan and how much you’ll pay in interest.
An excellent credit score of about 700 to 750 or higher will help you get the best possible interest rate on your mortgage.
Are you willing to budget?
The costs of mortgage payments, furnishings, lawn care and home repairs can really make a dent in your bank account. To stay afloat financially, it might be necessary to create a budget and—dare we say it—live a more frugal lifestyle. You should honestly ask yourself whether you’re ready to make the sacrifices necessary to afford all that goes into a new home before purchasing a property.
Home buying is an important milestone and an emotional purchase. If you are ready to purchase a new home, then Transparent Mortgage is where it begins. Our team delivers constant communication and provides clear accountability through the entire mortgage process. Using our proprietary visual mortgage dashboard, we offer our clients greater piece of mind by allowing them to monitor step-by-step progress of their loan, anytime and anywhere on any internet capable device. Contact us for a personalized quote and discover how we can help you move forward with confidence.