Home ownership is, for many people, the pinnacle of adulthood. A culmination of years of work as well as a sign of “settling down” and commitment, buying a home is also a status symbol which indicates to the world and you have achieved a certain level of personal and financial success. Needless to say, that is why buying a home is such a difficult goal for many people to achieve. Though most people want to buy a home and know that doing so is financially advantageous in the long run, determining if and when you are ready to do so involves understanding what home ownership really entails from a financial perspective. There are three questions that you can ask yourself to see if you are ready to buy a home or at least how far you are on the path.
Question 1: Can You Get a Loan?
While some people do buy their home outright in cash, this is rare. For most of us, one of those Installment Loans at HeartPaydays.com is necessary. So, in many ways, the first step in buying a home happens years before the act ever occurs. Securing an often six-figure loan means demonstrating to lenders that you have the means and ability to pay it back. This includes eliminating debt and increasing your income enough so that you will dedicate no more than one third of your income to a mortgage payment. It also means displaying responsible financial behavior over time, which is reflected in your credit score. The days of sub-prime lending are over (thankfully!) which means that those without a clean financial house have to clean it up first. Mistakes of the past, including bankruptcy, are possible to overcome, but only with time and change.
So, before you move on to Question 2, you need to achieve each of the following:
- No, or very little unsecured (credit card) debt.
While some credit card debt is easy to overcome with sufficient income, too much or a history of mounting charges shows lenders you cannot manage your income and spending.
- A secure employment history.
Depending on the loan, lenders will ask for anywhere from 12-24 months history in a job or industry in order to count your income as secure. Those who work for themselves will need at least two years of tax returns from their business to have that income count.
- A solid credit score.
Honestly, the higher the better, and anything above 740 is classified as “excellent”, so that’s a good goal. Although credit score isn’t as important as it once was and not a barrier to home ownership on its own, a low credit score often needs to be offset by a higher income or more savings.
Question 2: How Much Can You Pay Up Front?
Obviously, avoiding debt is critical, no matter if you plan to buy a home now or 10 years down the road. No one wants to dig themselves out of a hole before climbing a mountain, but having no debt (or very little debt) can only take you so far. You also need to have something extra. This is the second key element in home ownership – cash. Buyers need to save money for a down payment of at least 5% of the home’s purchase price. However, 20% is ideal. That means saving $40,000 to purchase a $200,000 home.
Buying a home with less than 20% in a down payment has its benefits and drawbacks. Generally, these buyers must be even more financially stable, with higher credit scores and income and lower debt than someone with more cash on hand. Also, putting less than 20% down literally costs you in terms of your monthly payment. This is because banks require homeowners with less than 20% equity to purchase PMI or private mortgagee insurance in order to protect their investment in the home and its buyers.
So, before moving on to Question 3, you need to secure the following:
- A 5% down payment and enough income to comfortably pay PMI.
Private mortgage insurance rates vary, but they generally will add on an additional charge equal to 0.3-1.5% of your original loan amount each year.
- A 20% down payment
Obviously, more than 20% down is also acceptable, but after eliminating PMI, the benefits of putting more money down vs. keeping it in savings or investments varies according to interest rate. If you are paying 4% interest on your home loan, but earning 5% interest in another investment form it is wise to keep the money there rather than put it into your home so long as you can make the mortgage payment.
Question 3: Are You Prepared to Continue to Pay?
Even with solid finances and a hearty down payment, being ready to buy a home means something more. That is because, unlike renting, home ownership comes with a ton of additional costs that add up over time, and I’m not talking about utilities.
Maintaining a house means taking care of small and large problems that range from fixing roofs and boilers to stopping leaky faucets and replacing a cracked baseboard. If you have a problem with your flat metal roofing and need a restoration or repairs, contact https://easternmelbourneroofing.com.au/services/flat-metal-roofing/. Over time, many people also wish to update their space which includes modernizing appliances and fixtures as well as changing things like floors or upgrading electrical amperage to better reflect personal tastes, habits, and the times. Therefore, the final element you need before you are ready to buy a home is:
- Savings beyond your down payment and enough income to keep saving.
Savings are key to helping offset these unexpected costs of home ownership. In other words, living paycheck to paycheck with a mortgage each month is not a good idea.
Anyone who has gone through the process of buying a home knows that there is more to it than meets the eye. From closing costs to renovation delays, this is a major undertaking and proper financial preparation is only the start of what’s needed.
Homeowners: what tips can you offer to those trying to figure out if they are ready to buy?
Future Buyers: what is the most challenging part of getting ready?