
The home buying process is not for the faint of heart so before you press go, being financially prepared is a must. For first time buyers without proper instruction, the steps leading up to a home purchase can seem daunting and overwhelming so here are a few questions to ask yourself to determine if you’re financially ready to purchase your first home.
Is Your Credit in Good Shape?
Having good credit is one of the most important factors when buying home. Your credit score helps to determine whether you’ll qualify for a home loan and the terms of that loan including your interest rate. It’s important to ask yourself this question first because building good credit takes time so if there are issues on your credit report it’s time to start fixing them now to ensure your score will be ready when you are.
Are You Financially Prepared to Apply for a Loan?
Being financially prepared to apply for a home loan has multiple parts.
There is the matter of being financially ready to payback a home loan which requires evaluating your debt to determine your DTI (Debt to Income Ratio). Your DTI will tell lenders if you can easily afford to make payments every month depending on how much income is remaining after you have made payments on your current debt.
Next, you’ll need to determine how much you can put aside for a down payment and closing cost. The amount of your down payment has the potential to affect your interest rate and may require you to pay for PMI (Private Mortgage Insurance) until you’ve paid for a certain percentage of the home. Closing cost vary on a case by case basis so it’s best to have an extra amount saved and consult with a realtor for a more detailed estimate on how much you should be planning for.
Are You Financially Secure to Maintain Your Home?
Renters are used to paying rent, renter’s insurance and utilities but there’s much more to homeownership than paying the mortgage and home insurance. Again, depending on how much you present for your down payment, you may be required to pay for PMI each month in addition to the mortgage, property taxes, home insurance, and cost of any maintenance your home may require. The days of calling the property manager or owner to fix and replace things are over because the home is completely your responsibility. New homes come with a warranty that often cover problems that arise within the warranty period but as a homeowner, it’s best to financially plan to cover unplanned home expenses by maintaining a designated savings account.
In addition to unexpected home expenses, it’s a smart move to plan for unexpected life events. Securing an emergency fund with at least 3 to 6 months’ worth of expenses can be the difference maker in staying afloat in the event of job loss, illness, or other unplanned circumstances.
As you can see, being financially prepared to buy a home takes time but with proper research, planning and discipline, you’ll be financially ready for your new home purchase in no time. Next week, look for Part 2 on Becoming Mentally Prepared for Your First Home Purchase.