Are you Ready to Buy a House?
Transitioning from a renter to a homeowner is the American dream. However, just because your siblings and closest friends have signed up for mortgages, doesn’t mean you should too. Buying a house needs a lot of consideration, as it links to major financial responsibilities. You don’t want to end up buying a house that will become a burden in the near future. Are you prepared to move on from a carefree life and indulge yourself in complicated matters like estate planning? Ask yourself the following questions to evaluate if you are truly ready to take the leap:
Can you Describe all Aspects of your Dream Home?
If you don’t know what kind of house you want to buy, consider it a major red flag. People who sincerely want and need a home of their own have thought about everything. They know about neighborhoods they prefer, how many bedrooms and bathrooms are necessary, the optimum size of the backyard, and so on. They have figured out everything from the material of the floors, to the layout of the kitchen. Indulge yourself in various home and lifestyle blogs/magazines to discover what your dream home looks like.
Do you have substantial Disposable Income?
Now that you are thinking about buying a house, I am going to assume that you have a reliable job or steady income. Take a moment to assess your lifestyle and all the luxuries you enjoy at present. How much money are you left with after paying for all your current expenditures? If you are saving 50% or more, you might be on the right path. The approved threshold for debt to income ratio by FHA (Federal Housing Administration) is 43%. Suppose you are earning $5,000 per month, your debt payments shall not exceed $2,150; debt payments include student loans, car lease, mortgage installments, credit card bills, etc.
Are you in Debt?
If you are deep in debt, adding to the load with a mortgage is a bad idea. Having too much debt clearly indicates that you are terrible at financial decisions. Another loan could be the last straw before you file for bankruptcy. Even if you are debt-free, the portion of your income that goes into housing must not exceed 25%; otherwise, sellers may not be keen on closing the deal with you.
What about your Credit Score?
Is your credit score booming beyond 800 or are you barely touching 600? A good credit score means better interest rates and a higher return on investments. If you are anywhere below 700, work on improving your score first.
How about a Savings and Emergency Account?
Your savings account must contain enough funds for the down payment of your dream home. Your emergency account is a separate entity, which should be kept aside for other unanticipated expenses. If you can pay 20% of the house’s value as down payment, consider yourself in a good place. Nowadays, it is possible to attain a mortgage for as low as a 3.5% down payment, but that route is the least cost-effective; you will be throwing in a lot of extra cash in the long run.
Do you understand the financial obligations of Buying a House?
Purchasing a house is not limited to the down payment and mortgage installments. Property taxes, insurance, repairs, and other communal fees may double your current estimate. Make sure you can manage all the expenses without going broke or committing white-collar crimes.
What are Your Future Plans?
Do not invest in a house if you don’t plan to stay put for the next five years. If you can see yourself living in a particular locality for the next five years and starting a family there, regard it as a green signal.