Tips & advice on getting your finances back on track.
As housing inventory increases with the spring and summer months approaching, many potential homebuyers will begin contemplating finally becoming a homeowner. Buying a home is a big financial decision, and before entering the housing market, you should evaluate your situation to determine if it is the right time for you to buy a home.
Here are a few questions to ask yourself when determining if homeownership is right for you:
1.Do you have money saved for a down payment?
While it is recommended saving 20 percent of the home’s value to put as a down payment in order to avoid paying Private Mortgage Insurance (PMI) cost that could amount to several thousands of dollars; this is often unrealistic for many potential homebuyers. Many lenders will extend you a loan if you have at least 3 percent to put towards your down payment. Consider how much money you can comfortably put down without depleting your savings entirely. Remember, as a homeowner, you must be prepared for the unexpected. Keep an emergency savings account for situations, such as home repairs and basic maintenance. If you’re savings isn’t quite where it needs to be, take some time to reevaluate your budget and spending habits, and develop a new strategy to help you reach your savings goal.
2. Do you have credit card debt?
Having credit card debt does not mean you cannot purchase a home, but if your debt to income ratio is too high, you may have trouble obtaining a loan. If you have credit card debt that you are struggling to pay off or only making the minimum payments, it is probably not the best time for you to purchase a home. Focus on establishing a budget that will enable you to pay down your credit cards. Also, build an emergency saving to ensure that you are not relying on credit cards when you become a homeowner.
Read More: 5 Tips For First Time Homebuyers
3. Is your credit score in good shape?
Your credit score is the biggest factor in determining your mortgage interest rate. While you may be able to obtain a loan if your score is less than stellar, you will likely pay a higher interest rate on your loan and your lender may require a larger down payment. Having a good credit score will save you thousands of dollars. Be sure to pull a copy of your credit report and check your credit score before you even begin to look at homes. Lenders generally have their own requirements when it comes to credit scores for mortgage loans, but if your score is reporting “fair” or “poor,” you may want to start taking active steps to increase that number before applying for a loan.
4. Do you plan on staying in one place for a while?
If you’re not planning to stay in a particular area for at least the next three years, then you may want to consider renting rather than buying. One major benefit of renting is that it gives you the ability to move freely with no strings attached. If you buy a house and then sell shortly after, you’re probably not going to walk away with any money because selling costs would likely outweigh any potential profit, and you may even take a loss. You could consider renting out the property should opportunity present itself to move, but you would want to make sure you are financially positioned to do so. Remember, finding a tenant can take time and could result in you having to pay double living expenses during months when the home is not rented. Be sure to consider your personal goals and financial situation before diving into homeownership.
5. Do you know how much home you can afford?
Before purchasing a home, you should have a good idea of how much home you can afford. You can do this by getting pre-approved by a lender or by simply using an online mortgage calculator tool. However, keep in mind that outsiders are making a generalization of what you can afford based on your gross income and an estimate of some of your expenses. The figure they come up with does not account for your lifestyle and personal financial goals. Develop a projected budget of what expenses would be like with a mortgage payment in your desired price range. Be sure to include all household expenses as well as utilities, groceries and miscellaneous expense. Also, you should account for an amount you can contribute towards any personal financial goals such as entertainment, travel, retirement and investments. Remember, just because a bank will lend you a certain amount of money does not mean you should borrow that entire amount.
Buying a home is a huge purchase and certainly not something to jump into. These five tips will help guide you before you purchase a home. Are you ready to take the plunge into homeownership?
Lauren Lovett has been with Navicore Solutions for seven years serving as a Certified Credit Counselor and Grant Writer. While in these roles, she has witnessed the positive impact that the organization’s counseling services has on improving the money management skills and economic security of individuals and families in need.