For many people, buying a home implies a certain amount of social status. Much is made of millennials who can’t afford to or choose not to buy a home, but that hasn’t stopped the housing market from continuing to tighten over the last several years. Can you afford to buy a house in 2018? Let’s look.
Do you know how much home you can afford?
When you go to a lender to get preapproved for a mortgage, they tell you how much they can give you for a mortgage. Many people take that amount and go shopping for a home that is around that price. But should you do that?
A lot of answering this question has to do with your feelings about your income security, how much a tight budget might be stressful for you, and if the homes you’re looking at are the homes you really need. If you would prefer to have more of a financial cushion, for example, you might look for a home that is significantly under the preapproval amount of your loan.
If you’re not sure the right amount of home for you to buy, mortgage calculators can help. Nerdwallet uses the same formulas as most lenders to help you get started.
Can you afford to move in today?
Most lenders don’t expect you to hand over a 20% downpayment when you buy a home; first time homebuyers can often get a 10% or even a 3% downpayment. That said, buying a home in and of itself is expensive; the easiest way to reduce the costs, which can be overwhelming, is to have plenty saved. In ideal circumstances, you’d have enough money set aside to cover a 20% downpayment, 10% for closing costs, your first month’s mortgage payment, your moving expenses, and have enough money left over for a repair fund.
Sound like a lot of money? For many homeowners it is. But getting into a new home and immediately finding things that need to be repaired and replaced is even worse, especially if you can’t afford crucial repairs. Having money stressors causing damage to a marriage is even worse.
Have you found the right lender?
It’s easy to assume that all mortgage lenders are the same. Many people go to their regular bank, apply for a loan, get it, and then buy a home. For some families and individuals, this approach is fine. Others, such as veterans, may be eligible for different programs such as FHA mortgage options, that allow them to get a mortgage at a lower overall cost.
Some lenders calculate income differently than others; some are accustomed to working with disadvantaged families and are familiar with the challenges families face trying to get into their first home. They can help families navigate various programs that can help them become homeowners.
Beyond that, some lenders are less likely to ask about upcoming income changes, which can be helpful if someone is about to take a leave of absence from work or has irregular income due to self-employment, for example. These small differences can make a big difference in whether or not someone gets a mortgage.
How’s your credit?
Having great credit isn’t required to buy a home, but it definitely helps. If you have a number of late payments, or your credit usage rating is already high, you may be denied a mortgage by the best lenders. If you can get a mortgage, the terms may not be favorable.
Taking time to improve your credit before you buy a home can be beneficial to your longterm wealth. Mortgage rates are already set to increase, based on movements the Federal Reserve has made in the last few years. That said, mortgage approval rates are around 88% right now, which means that if you apply for a mortgage and meet the criteria, you’re likely to get a loan.
If your credit is solid, your income is going to be steady, and you don’t have any other major factors that are likely to complicate getting a mortgage, this may be a good time to move forward. If, however, you can see easy ways to improve your credit, doing this before you apply for loans will certainly save you money over time.
If you’re not sure if you can afford to buy a home this year, start by talking to lenders. Find out how they calculate your income, if any federal or state programs are likely to help you make the move into home ownership, and run your numbers on some income calculators to figure out how much home you can afford.