Crunching the Numbers: Is Buying a Home in Your Future or Not?
Even though personal motivations differ, most people aspire to buy a home for comfort, security and independence. Homes are not cheap purchases, however, making it essential for you see what you truly can afford before signing any paperwork.
Where do you plan to live?
Housing costs vary considerably from region to region, sometimes into the six figure mark–you can find more information to make a comparison from realtors specializing in the areas you’re considering. Moving into a location where the typical home price is significantly higher might delay your homebuying plans until you’ve put away a larger nest egg. Conversely, if you move into an area where prices are low, you could save money, potentially putting a larger down payment toward the purchase.
What is your budget like?
There are two main types of mortgages: fixed-rate and adjustable-rate. Although your monthly payment amount and interest rate can be hefty with a fixed-rate loan, the monthly payment and interest rate are static. You might want to wait until you can afford the higher payments and interest because of how their predictability guarantees you’ll have enough left to cover your other bills. In an adjustable-rate mortgage, you’ll usually enjoy lower initial payments and rates of interest, which can mean homes that wouldn’t normally be affordable to you can work. The catch is that the lender has the right to modify your payment amount and interest rate over the course of the loan. If your budget doesn’t allow you to respond to hikes the lender might make, signing the mortgage usually is a bad idea. Additionally, regardless of which type of loan you select, other home-related costs, such as local taxes, can vary. You’re probably not ready to buy a home unless your budget is flexible enough to absorb potential increases within these charges.
Another area you need to consider in homebuying related to your budget is maintenance and repairs. Projects like putting in new windows or updating faulty appliances all can sap funds from your accounts, so your budget needs to accommodate these needs well before getting a mortgage will work. A commonly accepted guideline is to set aside one percent of the home’s purchase price every year for fixes. Nevertheless, some homes, such as “fixer upper” properties, automatically will start out with bigger maintenance needs and may continue to be a bigger financial responsibility over time.
Lastly, think about moving costs. This refers not only to elements like closing costs, but also resources like your moving boxes or truck. You should have the money for these expenses ready before you agree to a mortgage.
How much can you put toward a down payment and deposit?
Lenders want to see a large down payment when you apply for a mortgage. The idea is that a bigger downpayment demonstrates your ability to save and handle money responsibly, which the lender takes to mean you’re less of a late payment/default risk. Most reputable lenders won’t give your application much consideration unless you can show them 20 percent or more. If you can’t provide that much, the lender likely will require you to purchase additional private mortgage insurance (PMI) to the tune of up to 1 percent of the home’s price. Conversely, if you can afford 20 percent or more, you’ll probably get a much better rate of interest and lower monthly payment amount.
Your earnest money deposit (EMD) is a sum of money that goes toward your downpayment. It effectively takes the home off the market until you decide for sure to buy. Multiple factors affect what EMD amount should be, such as the condition of the market and specific lender requirements, but in general, 1 to 3 percent of the home price is reasonable. You’ll look more serious to both the lender and current owner if you can pay this, and in some cases, the owner might even lower their asking price!
What does the lender require?
Even if you think you could swing a mortgage, specific lenders might have requirements that end up in a rejected application. For example, you usually can’t have a monthly housing payment that exceeds 28 percent of your income before taxes, and lenders often want to see you’ve got an emergency fund covering 3 to 12 months of all your expenses. These individual lender requirements can make or break a mortgage deal.
The majority of people want to buy a home, but not everyone is financially ready to do it at the same time. Consider elements such as your budget, lender requirements and desired location carefully prior to seeking out a lender
Hollie Brennan works in property and understands many aspects of buying and selling. She likes to share her insights with an online audience and writes for a variety of property and lifestyle websites.