8 Money Factors to Consider Before You Buy a House

Buying a home is something most people dream of doing. We are taught from an early age that it is part of becoming successful and having security when we become adults. When you think of buying a home, you will likely feel a mix of excitement and fear, which is completely normal. Buying a house is one of the biggest financial decisions you will ever make.

But have you wondered whether buying a house is the right thing to do? Have you every asked yourself, or someone you know, “Should I buy a house?” The answer to this question will depend on a number of financial factors. Here are the top things you should have in place to be ready to buy a house.

 

Well Managed Debt

You don’t have to have zero debt, but you do have to have it well managed. That means that your debt-to-income (DTI) ratio is reasonable, and you have a good credit rating (aka. you pay your bills on time). The higher your credit rating the better. Ideally it should be over 700, although it is possible to get a home loan if it is lower than 700.

Your DTI is your monthly debt payments compared to your gross monthly income. It is common for lenders to want to see this DTI at 28% maximum, although some will accept a DTI of up to 50%. However, if you are approved for a mortgage with a high DTI and/or a lower credit rating, you will pay higher interest rates.

 

A Good, Stable Income

You will need to be able to prove you have a stable income. That means proof of steady employment for at least the two past years using your tax returns or pay stubs. If you are self-employed, you will need to keep a good trail of documentation that proves your income. This will include tax returns and bank statements for two years.

 

Emergency Savings

You might think that this should come later, but if you don’t have money set aside for emergencies, how can you expect to pay your mortgage on time if something happens? For that matter, how could you make your rent payment on time if an emergency were to happen right now?

Having an emergency fund is a must-have for anyone and everyone, no matter whether you rent or own your home. Most experts say you should have at least three to six months’ worth of expenses put aside for emergencies. This will cover you should you lose your job, something that became a reality for many people during COVID-19.

 

A Down Payment

See how many things you should have in place before you even consider whether you have enough for a down payment on a home? In other words, you need all your financial ducks in a row first. Then if you have down payment money on top of that, you’re in a really good position to buy.

There are many lenders that will accept as little as 3% as a down payment, but you have to have a good credit rating for that. And the higher your down payment the better. If it is 20% or more, you can avoid paying mortgage insurance, which will lower your monthly costs.

 

Other Expenses

Along with your down payment, you need to factor in other costs. This includes closing costs, moving expenses, and the money to buy appliances and do repairs and renovations your new home may need. If you don’t have the money to cover these additional expenses, you will suffer financially.

 

The Ability to Pay the Mortgage, Taxes, and Maintenance

This is something many people consider first, before they consider all the things we have already discussed. It is easy to think that because you can afford to pay your rent each month, you can afford monthly mortgage payments.

However, you need more than just the mortgage payment, which includes the principal and interest payments. You also need to pay your property taxes and your mortgage insurance (if you paid less than 20% down), and you need to have the money set aside for maintenance and repairs. After all, if you’re a renter and your appliances break or your furnace goes down, your landlord will pay for those to get fixed.

This means you need to determine what you can afford each month and decide how much house you can actually afford. And this applies to you not only if you are a renter buying a home for the first time, but also if you want to upgrade to a bigger or newer home. So, take everything into consideration when you are deciding if you should buy a house.

 

The Desire to Stay in Your Home Long-Term

Finally, are you planning on staying in your home for at least five years? That not only includes your actual house, but the neighborhood and city in which you live. Are you sure your job will stay in that location for the long-term? If you aren’t going to stay in your home for at least a few years, it may not be worth the closing costs and other expenses associated with buying a house.

 

The Final Word

Buying a home is a huge decision. If you are asking yourself should I buy a house, am I really ready, then you have a lot of thinking and calculating to do. However, if you are in good financial shape and you know you can afford a new home, then you can enjoy embarking on one of the most amazing adventures of your life.

 

Reach out to us today to find out more about determining if you are ready to buy a house.

 

Looking for more Foundation tips and learning? Return Home here.

Published 02.17.22

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