How to know when you’re ready to buy a home - Quincy Newspapers, Inc. - Print, Broadcast, Interactive

How to know when you’re ready to buy a home

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© iStockphoto.com / Andy Dean © iStockphoto.com / Andy Dean


By Andrew Housser

Home ownership is part of the American dream. Knowing when – or if – you are ready to purchase a home can be difficult. Some people delay purchasing because they want to have greater financial security. Others are unsure about the housing market or job prospects. And some are not yet ready to settle down. If you are thinking about making the leap, this checklist can help determine if you are really ready.

1. You have a predictable, reliable income and moderate debt.
To qualify for a home mortgage, you will need to demonstrate that you can pay all monthly bills. Generally, your monthly debt payments, including all housing expenses such as insurance, maintenance and upkeep (see below), should not be more than 43 percent of your income. That means that if you have a monthly income of $4,000, all of your housing and debt payments should be $1,720 or less. Lenders also look at your debt-to-income ratio. They like to see your total debt (including mortgage) payments totaling 36 percent or less of your monthly gross (before-tax) income. If you have greater debt than that, and cannot repay it, wait before jumping into home ownership.

2. You are prepared to stay put.
When you are renting, it is relatively easy to downsize or shift if need be. If income changes, or you find work in another area, most people can leave a rental with a few months’ notice. At the worst, you might sacrifice a deposit or be liable for a month or two of rent. Home ownership is a different matter. The cost of selling a home can be significant. Also, if the market changes, you might take a hit if your home has not had time to accrue value. Many experts recommend only buying if you plan to stay put for five to seven years.

3. You can pay more than the mortgage.
Most people think the mortgage is the major cost of home ownership. But the investment in a home does not stop with the mortgage check. Generally, you can expect to pay several hundred dollars more each month to cover insurance and property taxes. If your property has a homeowners or HOA fee, that can add hundreds more. Additionally, homeowners must be prepared to manage maintenance and upkeep. Some experts recommend setting aside 1 to 4 percent of the home’s purchase price each year to cover maintenance and repair. For a home costing $200,000, that can be up to $8,000 annually, or nearly $667 per month.

4. You have saved a down payment.
Virtually all mortgages require buyers to put down a portion of the price in cash (or certified check). This down payment reduces how much you must borrow to pay off the home. It also demonstrates that you are serious about buying the property. Some mortgages, especially FHA loans, allow buyers to purchase with as little as a 3.5 percent down payment. (Be aware, though, that FHA loans have additional up-front and annual premiums to help insure the mortgage, given the low down payment.) If at all possible, however, it is best to put 20 percent down. With a 20 percent down payment, you will not be required to purchase private mortgage insurance, which can add more to your monthly payment. Additionally, the less you borrow, the lower your monthly payments, which can save you a tremendous amount in interest payments over a 30-year mortgage term.

5. You have an emergency fund.
Make sure to retain an emergency financial cushion when you buy a home. Otherwise, if you run into a period of unemployment, a medical emergency or other unexpected expense, you could risk losing your home if you do not have adequate funds to make mortgage payments. Experts recommend having enough in reserve to cover six to nine months of living expenses.

6. You have a solid credit history.
Mortgage lenders are very cautious about lending. Without a credit record, buyers will not get far. Before you can qualify for a home mortgage, you need to have built a credit history showing that you pay bills reliably. This record may include paying student loans, car loans, credit cards or other obligations. Check your credit reports before you apply for a mortgage. You can get a free copy each year from www.annualcreditreport.com. If you spot any inaccuracies, contact the credit bureau to have them corrected before you apply.

7. You are preapproved.
Before you purchase a home, seek out a reputable mortgage lender and obtain preapproval for a mortgage. This process will ensure that you are ready to buy and help you to establish a target price range. Remember, too, that you do not have to purchase a home at the maximum price for which you qualify. Rather, purchase the home that you can afford.

Becoming a home owner is exciting. But it also is a major commitment. Taking the time to prepare can make the experience of buying your first home more exhilarating than scary – and will allow you to truly enjoy this major milestone.
 

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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