Preparing to buy a home is a bit like preparing to go on a very long journey. You have to have your finances in order, know where you’re going, what you’re hoping to accomplish and how much time and how much money you can afford to spend.
Financial matters. When it comes to owning real estate nothing is more important, for obvious reasons. As we’ve seen, if you get locked into a mortgage you can’t afford, the result can be devastating. But even if you can afford the mortgage, you might not want to be “house rich and cash poor”. You have to consider other things that are important to you such as travel and your spending habits. If for instance, you like to travel for months at a time, it might be wise to consider a smaller house with a less expensive mortgage instead of a large home with a big mortgage, which could cause you more work and less financial ability to spend on other things you like.
Another consideration is the length of time you want to have the mortgage. Many young people choose a 30-year fixed mortgage but if you’re a senior citizen you might want to opt for a 15-year loan. The best thing you can do is make a list of your financial matters and the questions you have about buying a home and then consult with a highly experienced loan officer. A knowledgeable loan officer can be like having a tour guide with you all the time in a foreign country where you don’t speak the language. The jargon used in the mortgage industry documents can be confusing. Having someone who can clearly explain the documents, what to expect, the time frame, and the process is priceless.
Debt-to-income. The ratio of your debt-to-income is vital when purchasing a home. These guidelines have become more strict since the housing crisis so it’s critical to consult with experts about your personal financial situation. Generally speaking, you should have a debt-to-income ratio of no more that 36 percent–meaning all you owe (including your mortgage, taxes, and insurance) should not equal more than 36 percent of your income. Remember there are still monthly expenses of your home on top of your debt. And, of course, the less you owe and the more you make, the better position you’re in for buying a home and creating your own financial freedom.
These days, along with keeping your expenses and debt manageable, a key factor to buying a home is having a healthy downpayment. Most lenders would consider 20 percent a good downpayment. The more you bring in, the less you have to borrow. Remember the collapse of the housing market was brought on by small or no downpayment loans and many buyers who simply didn’t understand the risks.
Know how long you’ll stay. This is really important because the cost of buying and selling a home is expensive and very time-consuming. If you’re not planning on staying in your home more than seven to ten years, think about renting. You may still decide to buy, but you need to understand the cost of purchasing and maintaining a home. Investigate the economic difference between buying and renting. Be realistic about how frequently you’ve moved in the past and whether you’re now ready to settle in for several years. You can always rent your home out but this assumes that you’ll be a landlord (willing to take on all those duties) and then also have to find another place to live and either rent or buy.
After considering all of these factors and making certain that you’re ready to buy, then take the next step and find the best agent in your real estate market. Your agent will help you further prepare to buy the home of your dreams.
Written by Phoebe Chongchua for the Realty Times