If you’re on your way to becoming a first-time homebuyer, it’s important to be prepared for all the responsibilities that come with home ownership. While starting this process can be exciting, there are a few financial guidelines to consider before you begin your search. Here are four steps to help determine if you are ready to buy a home.
1. Your personal finances are in order.
A key indicator that you are ready to buy a home is the strength of your credit score. A high credit score can help you get a better interest rate on your mortgage or lower closing costs required as part of your down payment.
Before meeting with a mortgage professional, review your recent monthly bank statements and the balances of any debt (credit cards, student loans, etc) This will give you a better grasp of your current financial situation. Demonstrating financial stability and consistency is crucial when speaking with lenders about a mortgage.
2. You have saved for a down payment.
Your mortgage may require a down payment that acts as a deposit on your home. A down payment gives you immediate equity (how much you owe compared to the value of the property) in the home and indicates your financial stability to the lender. Most financial institutions offer a wide variety of mortgage loans ranging from as little as 3% to 20% down on the purchase price of a home.
The amount of your down payment can impact your interest rate on a loan, closing costs, and overall monthly payment. Larger down payments mean lower risk for lenders which allow them to offer better rates or closing costs.
3. You know how much your monthly mortgage payment should be.
A common rule of thumb is to limit your monthly mortgage payment to 28% of your gross monthly income (before tax deductions). However, the costs of owning a home go beyond just the principal and interest on your loan. Additional costs such as property taxes, insurance, and water could add hundreds of dollars to your overall budget.
4. You’re planning to stay for a while.
Due to the time and resources required to buy a home, it is recommended to view your first home as a long-term investment. Home prices, on average, grow around three percent per year. If you purchase a home and plan to sell it within a year or two, there’s a chance the increased value (if any) may not cover costs associated with selling the home. Given the expected rate of home price appreciation, it will likely take at least three years for you to break even.
Buying a home is one of the biggest financial decisions you will make, so it’s critical to find the right one for you. Cinfed's mortgage calculator can help estimate how much home you can afford based on your monthly income, down payment, and interest rate. If you believe you are ready to get the home buying process started, contact a Cinfed mortgage professional to get the discussion started today.