When are You Ready to Buy a Home?
Everyone knows that buying your first home, or any home for that matter, is a big step. But how do you really know when you are ready to take it? Hundreds of thousands of people consider buying a home every year. While many of these people end up purchasing a home, many others realize that they are not quite ready for home ownership. Which group will you fall into? You’ll know the answer as soon as you understand the following: When are you ready to buy a home?
When are you ready to buy a home?
So, you finally think that you’ve saved up enough money to cover your down payment and your closing costs. Good job! Now it’s time to crunch the numbers. Your down payment will need to be between 3% and 20% of the property value or the purchase price, whichever one is lowest. Know that it is always best to put down at least 20% if you can. Here’s why. If you do not put down at least 20%, then you will have to purchase private mortgage insurance, which ends up increasing your monthly mortgage payment.
As for closing costs, they usually run you anywhere from 3% to 7% of the purchase price. After applying for a mortgage, you should receive a Good Faith Estimate of the closing costs within three days. Remember that this is not the actual costs, but only an estimate. Nevertheless, it should be close. Always budget to pay the 7%; that way if you end up paying less you will have money left over. As usual, it’s a good idea to have more than you need.
You will better understand if you are ready to buy a home when 1) You know how much home you can afford, and 2) You are willing to stay within this. A good rule to follow is that your total monthly mortgage payment should be less than 25% of your gross monthly income. Although some lenders will tell you that you can afford much more, do not listen to them! Make sure that you stay within what your budget says you can afford to spend, and do not let a mortgage lender pressure you into taking a loan larger than your budget allows.
You should be aware that there is more money involved with a home than just the mortgage payment. You also have to pay for homeowner’s insurance, property taxes, utilities, and maintenance/repairs. Homeownership is a lot of responsibility. Gone are the days of just picking up and moving out at 30-days notice. You can’t do that anymore.
One of the most important things you will need to do is check your credit report for any errors and inaccuracies. Alarmingly, nearly 90% of consumers will have an error on their credit report during some point in time. These errors can end up costing you thousands of dollars in increased interest rates if they are not corrected. Therefore, you need to access and study all of your credit reports as early as possible to allow time for corrections to be made before a potential lender checks your credit. Give yourself at least six months to fix any potential errors and, if necessary, to build your credit back up. Never go to a lender unprepared or uninformed. Make certain that you know your credit score.
You will also be ready to buy a home if you are willing to:
1. Not take on any other loans or credit until after you close on the property.
2. Not change your job until after the closing.
To show the lender that you are stable (i.e., low risk), you will need to keep your life "as-is" from now until the closing. This means no new no credit cards, no new jobs, and no new loans (e.g., cars, boats, furniture).
When are you ready to buy a home? While part of being ready for homeownership is just feeling ready, you also want to be familiar with the items discussed above. If you are unfamiliar with any of the items or don’t know the answers to a few of them, be sure that you to take the time to figure them out. Realize that buying a home is more complicated than just shopping and moving.
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