Owning a home is the American Dream but that does not mean that it is for everyone and that does not mean that you are ready for it. Here are a few things that you need to look at to see if you are ready to own a home.
1. Can You Afford It?
If you are considering a house, you obviously know that there will be a mortgage. You have probably done the mortgage calculators to figure out what your payment will be and maybe you even plugged it into your budget. Do yourself a favor right now and add about 200 dollars to that amount.
Your mortgage payment will probably be a nit more than you estimated and, there will probably be a first year escrow shortage. This is because your estimated property taxes will be based on the taxes currently being paid. When you buy the home though, the county will seize the opportunity to raise the home value to the market value and that will increase the actual property taxes due. This will result in an escrow shortage. Do yourself a favor and pay at least an extra 100 dollars a month to your escrow to pay for the eventual shortage. This will prevent a big increase in your monthly payment in the future.
Besides the mortgage payment, you have a lot of other expenses that will need to be accounted for. You will probably be moving into a much bigger place and increased utilities will come with the territory. In addition, you will have HOA fees, lawn care expenses, pest control, etc. A lot of other miscellaneous bills that you are not used to paying.
2. Is Your Credit Ready?
Your credit is going to have to be ready in order to get a home. That of course does not mean that you need perfect credit. The score you need will depend on the type of loan that you intend to pursue.
The most lenient of loans is the FHA loan and you can qualify for one with a score as low as 500. Of course with that score, you would need to have a down payment of 10 percent. If your score is 580 or better, you can get away with just a 3.5 percent down payment.
If you are looking at a VA, USDA or conventional loan, a 620 should be your starting point.
In any case, you want to get your credit score as high as you can. This means keeping your credit utilization as low as possible, paying your bills on time and only allowing mortgage relevant credit inquiries. No new credit besides the mortgage.
3. Do You Have Enough Money?
Buying a house is expensive and you will need a sizable down payment in most cases. Sure, there are some zero down loans like USDA and VA but if you are not using one of them, you will need at least 3.5% for an FHA and on up to 20% for a conventional loan. On a 200,000 house, that means anywhere from a 7000 dollar to a 40000 dollar down payment.
In addition, there will be closing costs which can be anywhere from 2% to 4% of the loan. You may be able to get the seller to pay these but they should be considered.
Lastly, you need to have some money in reserve for the things that always pop up when you buy a home. Moving costs, utility deposits and little unexpected expenses will add up. You do not want to be on your last dime when you take possession of your home.
4. Are Your Finances In Order?
To get your approval, you will have to come up with all sorts of documents. Better start collecting them now. You will need pay stubs, bank statements and tax returns. If you are getting a self employed loan, you will also need some extras like a profit & loss statement.
In the months leading up to your mortgage application, you should seek some stability in your bank statements. You will be asked to explain any large deposits or withdrawals so it is best to make your account look as stable as possible.
Overall, the simpler you can make your accounts look, the easier the approval process will be. Gather your documents early so that you do not need to scramble.
Your monthly debt will also be considered when you apply for a home loan. Every payment that you are currently making will be considered. Student loan payments, car payments, credit card payments, etc. They all go against your monthly income to determine how much you can afford.
Don’t take on any new debt and monthly payments before applying for a mortgage. If your monthly payments are high, consider refinancing loans to lower your payments at least six months in advance of your home loan application.
5. Are You Ready To Commit?
A home is a big deal. Gone will be the days when you could just up and move if you do not like a place. When you commit to a home, it is not so easy to move. Decide that you want to move to a new city and it could take you 6 months to sell your home, assuming that you have enough equity to do so. With the average rate of appreciation, it might take two or more years before you even have enough equity in your home to cover closing costs on a sale.
You will also now be responsible for everything that needs maintenance or repair in your home. No landlord to call. If that faucet starts leaking, it is your job to get it fixed. Repairs and maintenance can be costly, time consuming and sometimes stressful, so make sure that you are prepared.