4 Key Factors to Help you Decide if you are Ready to Buy a Home
Before you say yes to your broker or even think of applying for a loan, it is important to understand your current financial status. As you will be paying a substantial amount of money towards loan installments, you must have a clear understanding of your budget and how much you can afford to pay. No matter the type of home and neighborhood you choose for your home, it is a bad deal if your mortgage payments eat up more than half of your income. This post discusses several factors that you must consider before investing in a new home.
1. The Amount you can Afford The debt-to-income ratio is there for a reason. Most lenders use debt-to-income ratio to measure the borrower's ability to manage monthly mortgage payments and repay debts. Different loan programs have different debt-to-income ratios as criteria to set borrowerâ€™s mortgage limit. Where the Federal Housing Administration (FHA) uses 43 percent debt-to-income ratio as a guideline for
approving mortgages, USDA limits the ratio to 41 percent, provided the borrower has a credit score over 660 and stable employment. In short, all your cumulative expenses such as mortgage installments, property tax, and life insurance, among other household expenses, shouldnâ€™t be equal to or more than the debt-to-income ratio required by different loan programs.
2. Daily Expenses Besides Debt Your expenses donâ€™t come to a halt with the purchase of a home. You will realize that you now have other expenses added to your lists such as home decor, contemporary furniture pieces, and what not. In addition, you will be inviting friends over for house parties, take weekend getaways every month if not every week, or maybe hire a personal trainer. Though none of these are substantial expenses, they can be the driving factor behind delayed payments of obligations such as the electricity bills, if you have bought a home based on debt-to-income ratio alone. Before you commit to specific mortgage payments, it is wise to subtract the cost of your most expensive hobbies or any other leisure expenses and then decide whether the remaining amount supports your home buying decision.
3. Down Payment Per Se It makes sense to make 20 percent downpayment than paying private mortgage insurance (PMI). PMI is a risk-management tool that protects lenders against loss if a borrower defaults on the loan. A PMI may cost you $50 to $100 per month, sometimes less or even more. If you are not comfortable making a 20 percent down payment, you can pursue FHA and USDA loan program options. While FHA requires minimum 3.5 percent downpayment, USDA minimum downpayment requirement is just 2 percent.
4. The Right Time to Buy Home The best time to invest in a property or buy a home is off-season. If you are not sure about what you are going to do for next 10 years, or your stay at the current location, it is not the right time to buy a home. In addition, you can consult with your broker as to the time they think it wise to invest. Lastly, if you plan to stay for long, say more than 10 years, then no time is good or bad.
Conclusion No doubt, affordability should be your number one criteria to decide whether you are ready to buy a home, and you should consider privileges associated with several loan programs for first time home buyers. There are several loan programs such as USDA
rural development in Texas, that offer additional loan benefits to homebuyers planning to invest in a property in the rural areas. To learn more about the pros and cons of USDA loans or any other loan program, consult a loan specialist. A loan professional is well placed to guide you through the mortgage process, helping you identify your long term ability to repay the loan.