Buying a home is serious business. Many people think that they are ready to buy a house, only to find out after they move in that they can’t afford the maintenance and taxes. Here are some things you should take a serious look at to help you make a true decision as to whether or not you can afford to buy the house.
Credit Score: If you are not on top of your financial life, don’t even think about applying for a mortgage. Lenders are want o see excellent credit, a good financial history, and a safety net of cash before they are willing to approve a mortgage loan with good and reasonable terms. If your credit score is under the 730 range, work on boosting your score and cleaning up your history before even approaching a lender.
Down Payment: You’ll need money for a down payment. Lenders will want you to have a cash amount available to be used as a down payment. Traditional mortgage lenders want to see between 10%-20% of the purchase price in your savings account. If you don’t have a cash reserve for a down payment, you’re not ready.
Mortgage: You may calculate the mortgage amount you’ll need to pay on a particular property by doing some simple division, but there is certainly more to it than that. You’ll not only need to be able to afford the principle amount of the loan plus the interest, you also will need to consider the amount necessary each month to cover homeowner’s insurance, HOA (home owners association) fees, taxes, and other loan factors rolled into your monthly payment.
Responsibility: Owning a home is a big responsibility financially and physically. If you are used to renting and the landlords took care of everything, you may be overwhelmed by the actual reality of owning your own place. You’ll need to be proactive with maintenance, yard work, take care of (or be able to afford) service for necessary repairs, and stay on top of every last detail of the physical structure of your home and overall property.
Time Period: If you see yourself moving before hitting the two year-mark you could be hit with capital gains tax on your home so really think hard about where you see your life going. And, unless you plan to reside in the home for at least five years, it may be wiser to keep renting until you have some concrete ideas about where you plan to be in the future.
Cost of Moving: Moving into a home costs a lot of money. Don’t forget to consider the cost of physically moving your belongings to a new location. Remember that there will be hook-up fees for new services like cable and other utilities. You may need to pay for professional cleaning services or do some repair work to the new house before you can move in. A comfortable savings account should be built for this purpose long before you commit to a home purchase. See: 7 Signs You’re Not Ready to Buy a Home.
Can You Keep Up an Emergency Fund? Owning a home is likely one of the largest financial responsibilities you’ll have in your lifetime. If paying the mortgage and all of your other bills leaves no room for the stashing of cash into an emergency savings fund, you may want to hold off on a purchase until you have a sufficient financial safety net for repairs and unexpected emergencies (job loss, home repairs, illness).
While the math on paper may look great, and while you may really want to call yourself a Homeowner consider if paying for a mortgage and all the other costs is truly within your abilities. It may feel discouraging to put your home purchase on hold but it’ll be worth it in the long-run when you’re on more stable financial footing, and you’re paying way less in interest every month.