Homeownership is a serious commitment and most likely the biggest financial decision you’ll ever make. That’s why it’s crucial to make sure you’re ready in all aspects. Having enough money saved for a downpayment doesn't equal being ready to own a home, there are several factors to consider before you start browsing the market. Here are a few to start thinking about.
- Employment History
When it comes time to apply for a home loan, lenders want to be sure you have a steady income in order to afford your mortgage payments. Typically, you’ll be asked to provide two years’ worth of proof (W-2’s or tax returns).
- Debt-to-Income Ratio (DTI)
It’s common that a home loan isn’t the only one you’ll be paying off, so lenders also want to make sure the addition of another won’t be overbearing. DTI is calculated by adding up all of your recurring monthly debts, including credit card debt, car payments, and student loans, etc. Then, divide that number by your total monthly income and multiply it by 100 to get your percentage. A majority of lenders are looking for a ratio that’s less than or equal to 45%.
- Savings
The cost of buying a home extends beyond the price tag. In addition to the down payment, which is usually around 20%, there are closing costs. Closing costs cover any fees required to close on a home, usually split between the buyer and seller, this amount adds an additional 2-5% of the purchase price.
- Credit Score
If your credit score is at least 500, this is a good start for a Federal Housing Administration (FHA) loan. The exact score you need depends on the loan you’re applying for, and this information will be provided by your lender. Regardless, working to improve your credit score will save you money long term.
- The Current Market
If mortgage rates are low (which they are now!) it is a good time to start preparing to buy a home. Every area differs, however, so it’s a great idea to consult an experienced real estate agent to get specific details on how your local market is doing.
- 5-Year Plan
Buying a home really only makes financial sense if you plan to stay there for at least 5 years. It takes about 4 years to break even on the cost of a home purchase.
- Other Expenses
If you have multiple expenses on the horizon like a wedding or sending a child to college, you may want to wait things out. Financial stability is key when it comes to buying a home, and that means you may have to sacrifice spending in other areas for a few years at least.
No matter your current financial state, we are always here to answer any questions you may have about purchasing a home, upgrading, downsizing, or the current market in general! The Coastal Marketing Group with Re/Max at the Shore takes pride in knowing the local market inside and out because that’s just what we are: locals! Give us a call at (609) 884-4242 to speak directly with an agent anytime.
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