The Internet makes it easy to buy a home. Realtor.com and Zillow put real estate at your fingertips. And there are even options to find loans online and be preapproved without having to step foot in a bank – it’s easier than ever to buy a home.
But are you really ready to buy a home?
There are a lot of questions that you can ask yourself to find out if becoming a homeowner is a smart choice for you.
What Can You Afford?
The most important question of all. You need to know what you can afford. If you don’t have the finances to purchase a home, you can work on your credit and try to start saving money for a down payment.
A few of the items you’ll need to consider are:
- Mortgage payment costs
- Property tax
- Escrow needs (property tax and insurance)
- Repairs
- Utility expenses
- Repairs
- Upkeep
You’ll also need to have a proper debt-to-income ratio. What’s this ratio? A debt-to-income ratio is a ratio used to determine the percentage of debt you have compared to your actual income. The Federal House Administration (FHA) has a standard ratio of 43%.
What this means is that the borrower will have enough money to make payments on a monthly basis.
Borrowers have options to put more stringent DTI ratios in place, or the borrower can be a little more lenient and offer a higher DTI of 50%, for example.
You can calculate your DTI by writing down your:
- Debt payment
- New mortgage payment
- Homeowners association fees
- Homeowner’s insurance
- Mortgage insurance
- Property tax
If all of these figures, when combined, are higher than 43% of your monthly gross income, you may have a hard time finding a loan.
Understanding Closing Cost Amounts
Closing costs are a major expense, and as the Law Offices of Scott D. Rogoff, P.C. lists, these costs may include:
- Loan origination fees
- Title insurance
- Home inspections
- Appraisal
- Real estate commissions
You may need to put money into escrow, too. Homebuyers may be able to negotiate with the seller of the home to pay the closing costs. When a market is a seller’s market, where homes are selling fast, it will be harder for the buyer to negotiate the seller paying the closing costs.
A good real estate agent may be able to work on ways to have the seller paying for closing costs which may include paying more than asking price, but the seller pays the closing costs.
Bank of America has a calculator that will help you determine the closing costs you’ll need to pay based on a variety of different factors.
Down Payment Requirements
You’ll need to have a down payment for the home, and this can be a varying percentage of the home’s cost. In many cases, this will be 20% of the home’s value, so $20,000 for every $100,000 spent.
But there are other options available, too.
You’ll find that there are some options to put just 3.5% down on a home. Offered to many first-time homebuyers, this option will require you to pay private mortgage insurance (PMI).
Lenders claim that saving 15% to 20% for a down payment shows the bank that you have a commitment to the home you’re purchasing. Not only are you investing a substantial amount of money into the home, but you’re also showing that you can work and save money. It is a commitment that banks value and will use as a means to lower their own risk when selling a home.
If you’re not able to afford the home, according to the bank, you may have to pay down your other debts. This means:
- Paying off credit card debt
- Paying off student loans
- Paying off car loans
The lower debt that you have when going into the purchasing process, the better. Banks are interested in how much debt you have as a borrower because they want to limit their risk of a loan defaulting.
A borrower needs to be able to satisfy all of their debts, and this means being able to pay their mortgage, property taxes, insurance, credit cards, school loans and others. If you’re unable to get a preapproval, you may need to lower your sights to a home that is more affordable and in your price range.
