Certainly, you need to be ready to accept the responsibilities and the mindset of thinking like a homeowner. But there are also some very practical financial issues that you need to consider before beginning the home buying process. If you agree with the following statements, you’re probably ready to begin.
1. Your personal finances are in order.
Assess the current state of your debt: credit cards, auto loans, student loans and personal loans. A key indicator of readiness is your credit score. Managing your credit score is a separate and very important topic [link to credit score improvement blog], but having a high credit score can pay off when you get a lower interest rate on your mortgage — potentially saving thousands of dollars over the lifetime of the loan.
So before your first meeting with a mortgage professional, collect the most recent monthly statements for your checking and savings accounts, as well as statements for any other financial holdings or investments. Overall, financial institutions are looking to make sure you demonstrate economic stability and consistency.
2. You’ve saved for a down payment.
Mortgage loans have a wide range of down payment options. The amount of your down payment can affect the interest rate, closing costs and monthly payment. Larger down payments equal lower risk for the lender which in turn allows lenders to offer better rates or closing costs. Your credit score or credit profile can also determine the amount of down payment that is required. Down payments can not be borrowed. Gifts from immediate family can be used, however a signed gift letter will need to be provided stating that it is a gift and no repayment is required.
3. You have a good idea of what your monthly mortgage payment should be.
As a starting point, you can figure a monthly payment that is about 25% of your take-home pay, a total which should include taxes and insurance. You can get a basic estimate by entering the home price minus your down payment into a mortgage calculator (there are many mortgage calculators available online).
However, the costs associated with home ownership go beyond just your principle and interest. Additional expenses may include property taxes, insurance, homeowner’s association fees, city assessments, water, sewer and garbage. These charges can add hundreds to your monthly budget and should be factored in as well.
4. You’re planning to stay for a while.
Because of the time and resources required to obtain your home, you should view it as a long-term investment. Home prices, on average, grow about three percent per year. So if you buy a home and sell it within a year or two, there’s a chance that the increased value (if any) may not cover the cost associated with selling the home. Think about the costs of securing the loan (including closing costs), moving, pre-move-in preparations and repairs, as well as the real estate sales commission, which is typically six percent. Given the expected rate of home price appreciation, it will likely take at least three years for you to break even.
Because buying a home is one of the biggest financial decisions you’ll ever make, it needs to be the right one. If you agree with these four statements, you’ll know that you’re ready to contact a mortgage professional and get the discussion started.