With guidelines for home loan eligibility tighter than they were a few years ago, it’s helpful for consumers to know what to expect before submitting a mortgage inquiry or making an offer on a home. Don’t wait until you find the right home to discover that an area of your financial portfolio may be holding you back. Lenders will examine your income, assets, credit and debt to determine your ability to responsibly handle a monthly mortgage payment. So why not examine these for yourself?
Life is full of phases. Whether it’s finally throwing out that frayed denim mini skirt or coming to the realization that no, your mullet doesn’t imply “business in the front, party in the back,” there comes a time in life when certain phases must come to an end.
The same thing will likely happen with your living situation. Whether you’re looking to settle down with your significant other or you’re itching to invest in more than just your monthly rent check, the time may come when you’re ready to switch hats from renter to homeowner. But how do you know if you’re ready, financially?
Before you start considering homeownership, you have to make sure your finances are in order. You’ll want to beef up your credit score if it’s below the mid-600 range. If your score is a little low for your – and your lender’s – liking, look into tools like Quizzle that can help you raise it. Quizzle helps you keep track of your payments and regularly monitor your credit score. The lower your credit score is, the more fees and higher monthly payments you’ll wind up paying in the end. Start by paying off any debt you have and keeping your credit card balances as low as possible. If you have a score of at least 650, depending on your lender, you should be eligible for financing.
You’ll also need to make sure you can afford all of the upfront costs and fees that come with a home loan. By the time you close your loan, you could be looking at up to $5,000 depending on your lender, state and loan type. (If you qualify for a VA loan, you don’t have a down payment to worry about – but other loan types require one.) When it comes to down payments, most lenders ask for 20% of your loan initially. If you’re unable to offer that much upfront, you’ll likely have to pay monthly mortgage insurance, or PMI. Mortgage insurance is an additional cost that’s separate from your mortgage balance, and it doesn’t get you any equity in your home. It’s purely cushioning the blow your lender takes if you fail to pay off your home. And it can add up to thousands of dollars per year.
A large down payment also makes you look great if you’re not the only buyer interested in the home you have your eyes on. Real estate deals can fall through if the financing is unsuccessful, so you’re proving your legitimacy by offering a large down payment. The seller can trust you’ll hold up your end of the deal by actually getting approved by your lender. (Mortgage lenders aren’t big fans of small down payments.)
Additionally, substantial down payments mean less interest in the long run. Since you’ll have less money to pay off, you’ll have smaller mortgage payments month-to-month. This also leaves you more freedom with your spending throughout the month, or more money you can save for college funds, weddings or that yacht you’ve always wanted.
The long-term costs are another thing to consider. Owning and maintaining a home can be costly. Everything from landscaping to household repairs will be your responsibility – not your landlord’s. Some people say you should budget 1% of your home’s value annually with a “just in case” mentality. But you should take things like your home’s age, location and region into account. Is your home in an area that’s prone to flooding? What about natural disasters? How long ago was the roof replaced? There are so many questions to ask that it’s not possible to slap an annual number on how much you should save each year – unless you can predict the future. You can do your best by getting a great home inspection and thinking in-depth about what you might need to prepare for.
Another large factor in deciding to buy a home relies largely on how stable you feel in your life. If you have a steady flow of income and you’re living in a location you can see calling home for the foreseeable future – most homebuyers stay in their home for seven years before selling – you might want to buy. A lot can change in seven years, and if you’re buying a home, you want to make sure it will get you through all of the changes your life will go through in that time. Make sure you check out the school districts in your area if you’re thinking about having kids. How close is it to public transportation? What about the seasonal patterns? This is also a great time to talk to anyone and everyone you know living in the area if you’re at all unfamiliar. Ask for their brutally honest opinions.
Buying a home can also be an investment, depending on the market. If interest rates are low and you can pay off your mortgage reasonably fast, your home’s value will likely go up by the time you want to sell it. While paying rent doesn’t benefit you at all in the long term, your home can help enhance your wealth. If you keep your eyes on the housing market and find a home that you can afford, it might not be a bad idea for you to invest in a home.
Buying a home is a big decision that comes with a lot more responsibility than a rental property. But if you’re in a stable place in your life and financially prepared, it can definitely be worth it. How did you know that you were ready to purchase your home? Any tips for first-time home buyers? List them in the comments section below!