3
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 borrower’s mortgage limit. Where the Federal Housing Administration (FHA) uses 43 percent debt-to-income ratio as a guideline for

4 Key Factors to Help you Decide if you are Ready to Buy a Home

Embed Size (px)

Citation preview

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 borrower’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, shouldn’t be equal to or more than the debt-to-income ratio

required by different loan programs.

2. Daily Expenses Besides Debt

Your expenses don’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.