Buying a home is a huge financial accomplishment that can take years of planning and saving. As you prepare to become a homeowner, here are five questions to ask yourself in order to gauge your financial readiness:
1. What Are My Financing Options?
Most people don’t have the cash on-hand to buy a home outright, and that’s OK. Mortgages, or home loans, are the most common way that buyers purchase homes.
Understanding your options and their requirements will help you secure a mortgage that best fits your needs.
Many buyers opt for conventional loans, which are typically fixed-rate and suitable for those in good financial health with established income and low debt. If you qualify, you’ll have a higher down payment but lower monthly payments.
The Federal Housing Administration (FHA) also offers mortgage programs aimed to assist first-time buyers. Home loans backed by the FHA provide benefits, such as a lower down payment and more lenient requirements for qualification, which means you may still be able to buy a house even if you have sub-par credit or you don’t have a ton in savings.
If you’re a veteran, service member, or eligible spouse, you may also qualify for a VA loan, which can require $0 down.
2. Do I Have Enough Money in Savings?
Chances are you will need to have a decent amount of money saved up for a down payment. If you qualify for certain types of financing, such as FHA loans or VA loans, you may not need to put more than 3.5% down on your home.
However, you will still be responsible for closing costs, so you’ll need to save money anyway. Regardless of the type of loan you use, you should plan to save about 10% of your home’s purchase price.
Once you have a general sense of the amount that you need and that you can reasonably afford to put toward a new home, you can set spending limits and trim down other expenses to reach your savings goals.
You could also explore side hustle opportunities to boost your income and grow your savings faster. How long this will take is up to you and the goals you set for yourself. But, the sooner you start, the better.
3. Am I Prepared to Meet the Monthly Payments?
Unless you’re able to pay for your new home in full, you must be prepared to make monthly payments after closing.
As a homeowner, it’s important to remember that your expenses aren’t limited to your mortgage.
You’ll also be responsible for paying property taxes, insurance, and possibly private mortgage insurance (PMI), which can add hundreds to your monthly expenditures.
As you prepare to move, consider setting aside a few hundred dollars each month, or the amount you expect to pay for these costs once you’re a homeowner.
This is a good way to gauge how much you can actually afford, and the money you stow away can then be used toward your down payment.
4. Is Now a Good Time to Buy?
Faced with an unstable economy and looming uncertainty around the pandemic, it’s especially important that you keep up with the housing market and real estate trends.
Housing conditions vary from one community to the next, so having a deep understanding of your local job and real estate markets could help you better forecast the best time to buy a home.
If you’re unsure of whether to jump on an opportunity or wait, consider working with a real estate agent to help you weigh your options.
Your agent should have a deep understanding of the local market and provide advice based on similar home sales in the area. They should have your best interest in mind and also be able to help negotiate a lower price on your behalf.
5. What’s My Credit Score?
Lenders will evaluate your creditworthiness by looking at your credit utilization rate and payment history.
A higher credit score may help you secure a lower interest rate, which could save you thousands of dollars over the life of your loan.
To qualify for the best mortgage rates, you should aim to have a credit score of at least 760. However, you may still qualify for certain financing with a score of as low as 500.
Check your credit report at least one year prior to buying a home and consistently check for inaccuracies in the months leading up to buying.
If you notice any issues, such as identity errors, unauthorized accounts or wrongly reported balances, you should contact the creditor promptly to fix the mistake.
Monitoring your credit early in the process will ensure you correct any issues and make necessary adjustments to improve your score as you prepare for homeownership.
Conclusion:
Understanding your financial position and obligations is one of the most important steps to becoming a homeowner.
Whether you are ready to buy soon or are simply thinking ahead, ask yourself these five questions to determine if you’re ready to take the leap into homeownership.