It happens to many of us that we reach a point in life (that doesn’t have much to do with age) that we realize that we’d like to stop renting and find a home to settle into, a place of our own. It’s also very often the case that having the epiphany doesn’t necessarily mean we’re ready to jump straight into the process of home buying. There are several good signs that will help you know if you have the financial and personal responsibility levels, as well as the knowledge, to embark in the process of finding your first home:
You know where you want to live
There’s an area in a city -or outside it- where there are homes you like, it’s accessible for your and your partner’s work, and it’s a good school zone for your kids, if you have them. These are the most important factors when it comes to finding a place to settle down for the long haul, which is what will happen if you buy a home.
You have a personal budget and know how to use it
When I answer questions on Quora on behalf of OAS FCU, oftentimes I run into folks who believe that having a budget means that you know how to distribute your money; while that is technically correct, a budget is not something you simply make up and use. First you have to find out how you’re actually spending the money. And that’s the first budget we all make.
If you’ve never made your own, here are two articles that will help you do it; it’s the end of the month so now’s the perfect time to start. Here’s the article Getting Started (on your personal budget), and this is Making Your Personal Budget, which includes a very easy Excel spreadsheet to input your numbers to obtain a report, and it explains how to interpret your results. Not just that, it also provides information on how to start saving based on your results.
Your credit history is good
If you don’t know how your credit report is doing, there’s no better time to get it and check it
out. You can get your credit report for free once a year from each credit bureau (Equifax, Experian and TransUnion) through the webpage Annual Credit Report; this is the only site guaranteed by the US government to be legitimate, and free.
You will also need your credit score, which you can obtain by paying a small fee to one of the credit bureaus listed above. According to the Fair Housing Act you must have a credit score over 580 to obtain a standard mortgage loan. To get better loan terms, it’s recommended to have over 640 points. If your score is low, consider reading our article on how to establish and improve your credit.
And if your score is doing well, but you know you have time to improve on it to get the best loan rates when you decide to buy your home, here’s our guide to making your credit report excellent.
Your finances are all in top shape
You have stable income from a secure job: this is very important. I’ve mentioned in previous articles that changing jobs when you’re applying for a home loan is likely to completely derail your mortgage approval. Lenders want home loan borrowers to have a steady job, and they want them to have worked at their current employment, at least a year, ideally two. If you’re an independent contractor, or have your own business, you will be ok if you can provide two years tax returns that show steady income.
You have the down payment: the more you have saved for a down payment, the better loan
terms you will obtain. In the old days the minimum was 20%, but nowadays 10% is more common. They will even take less than that, but the lack of savings on your part will show on the loan terms offered to you. Also, with a small down payment you might be required to have Private Mortgage Insurance.
You know what you can afford on mortgage, and still have money for savings: when you use an online calculator, remember to include the condominium or community fees that you expect to pay. The average condo fee nowadays is $500. If you need a loan calculator that includes this factor, Zillow has a good one; to include condo/community fees in your calculation, select the Advanced tab and add the information on the right field, as well as any other specific data that will help your calculations. The more you know, the better the calculation will be.
You understand your debt ratio: On the Zillow worksheet you will see a Debt-to-Income (DTI) box. It’s the proportion of what you owe each month compared to your income. Your ratio shouldn’t exceed 36%, though lenders can make legal exceptions up to 43% DTI. The lower debt ratio you have, the better loan terms you will be offered, because it means that you can afford the loan more comfortably and have money to spare and save. Use that box to have a debt ratio that helps you save.
You can afford your monthly payment...
No, that isn’t enough. Having a home of your own is a great responsibility, both mental and financial. When you own the place and something breaks down or you need to make a repair, there’s no landlord to call. You need to be ready to make repairs and replace things that break down; if you can’t repair things yourself, you will have to hire someone to do it.
For that, you need a home repair budget. It’s estimated that you will need between 1% and
4% of your home’s value every year Ideally, in a savings account) for repairs and
replacements.
If you are ready and plan on looking for a home this year, I wish you the best and want to leave you with two more articles. One of them will help you learn most of the terms you’ll hear during your home search and home loan application process, and it is Definitions in personal finance and investment: Real Estate Purchase and Lending Terms.The second one is titled Before you buy a home and it has all the dos and don’ts of getting your home loan approved. Best of luck!
1 comment :
thank you .I asked u a question on q uora. nice article.
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