Thursday, May 10, 2018

When to Buy a House: Find Out if You’re Ready

When to Buy a House: Find Out if You’re Ready
How do you know when to buy a house? Is there ever a right time? Buying a home is a huge decision that should be carefully planned out. Given that there are many steps involved in the process of buying a home, you’ll want to make sure your finances are properly prepared.

In this article, you’ll learn how to determine what you can afford, ways to realistically calculate your monthly expenses once you get a mortgage, how to test your budget, cautions to look out for, and how to know when it’s the right time for you to become a homeowner.

Figuring Out What You Can Afford

The first step in determining whether you’re ready to buy a home or not is to find out how much house you can afford. Review the housing market in your area and look at your income. You can get pre-approved for a mortgage (this involves running your credit) which will tell you how much you can borrow but you must consider the other costs associated with owning a home aside from the mortgage payment.

In addition to your mortgage payment, you may have to pay homeowner’s insurance which can vary depending on where you live but can generally add an average of $600 – $1,600 per year to your mortgage costs.

You’ll also have to consider paying property taxes, a homeowner’s association fee (if it applies), closing costs on your mortgage, and ongoing repairs and maintenance expenses.

Given all the additional expenses homeowners are often subject to, it’s best to borrow less than the amount you get approved for, and make sure that you are confident that you can afford all the monthly and annual expenses. A general rule of thumb is to never allow your total housing costs to exceed 30% of your income. So, if your monthly income is $4,000, you don’t want your total housing costs (including your mortgage and any fees) to exceed $1,200 to be on the safe side. That way, you can still have money left to cover your other expenses.

Calculating Monthly Expenses Beyond Your Mortgage Payment

Once you have an estimate of how much you can afford for a home, you’ll need to calculate your monthly expenses to ensure your mortgage will fit in your budget. Keeping your housing expenses at or below 30% of your income is a good start because you’ll have other important expenses like food, childcare, healthcare, and utilities to consider.

Realize that you may need to adjust your budget to make room for expenses like repairs and maintenance, meaning you’ll need to save more money when you become a homeowner. Also, consider other debt payments you have and how they might be affected if you were to get a mortgage.

You want to make sure you can pay all your bills and live comfortably when you become a homeowner. Your new budget may be higher once you realize how being a homeowner increases your expenses. You can start preparing by setting aside extra money each month that can be used for your mortgage down payment and extra expenses for your home.

Testing Your Budget

Once you’ve worked out a new budget that will accommodate your mortgage payment and housing expenses, feel free to test it out so you can ensure it’s realistic for your lifestyle and needs.

Make sure you boost your savings for expenses like the down payment and closing costs, emergencies, and other savings categories. Then, you can attempt to live off your new monthly budget and see if you’d ideally have enough left for the mortgage payment (minus your current housing payment) and other housing expenses.

If you find that you’ve budgeted too much for certain expenses, you have time to change things around. If you focus on changing your lifestyle and actively testing out your adjusted budget, you’ll feel much more secure about your finances when you become a homeowner.

Don’t Buy a Home If…

While buying a new home can be an exciting process, it’s important not to rush into it. There are quite a few circumstances when you shouldn’t consider buying a home and should opt to wait instead.

First, you shouldn’t buy a home because you’re considering an income increase in the future. It’s important to buy a home based on your current income and savings amount to ensure you’ll be able to afford it, in case your income doesn’t increase when you think it will.

Also, if your income is unreliable, you may want to wait to purchase a home. If you’re self-employed, lenders like to see at least 2 years of tax return forms so they can assess your income, since it will usually fluctuate.

Another reason why you may not want to buy a home is if the new budget you tested out makes you feel uncomfortable. You may think you can afford more than you actually can, which is why testing your budget and building up your savings is so important when considering buying a home.

When you find a home you’d like to buy, or even before you start looking, get clear on how long you wish to stay in the home. If your job causes you to relocate or travel often, or if you don’t see yourself in the area within the next few years, you may not want to be tied down to a home that you’ll have to sell quickly with little equity in the property should you have to move.

When to Buy a Home

There may not be a perfect time in your life to buy a home, but you can make sure you’re ready from a financial standpoint so you can purchase a home with confidence.

You’ll know you’re ready to buy a home when you’ve reached a good credit score, and feel like you can afford a mortgage and the extra expenses associated with homeownership.

Your credit score is a very important part of the process if you’d like a mortgage with a low interest rate. If you’ve been setting money aside for a while and have a solid, steady income, you’re likely to feel more secure and prepared to purchase a home.

It also helps to have good money management skills and know how to budget, track your spending, and prepare for expected and unexpected expenses.

Finally, you want to make sure you’re ready to buy in a particular area. Your new home doesn’t have to be your forever home, but when you buy, the general rule is to stay in the home for at least 5 years.