There are a lot of things to consider when buying your first home, and if it’s crossing your mind right now, it might be time to give it even more consideration. But are you really ready to own it, or should you consider renting?
Home ownership is often touted as a popular facet of the American Dream. But buying a home is not something you do on a whim. Rather, it’s a deliberate process that involves assessing your life to determine if buying a house is a financially sound step for you. Here are some signals that you might be ready for homeownership.
You’re Totally Debt Free
You know you’re ready to buy a home when you are debt-free. Not only would paying a monthly mortgage seem like a herculean task, but getting a mortgage lender to finance your home could be difficult as well, although we have the best in the business on our team.
Lenders often decide to lend based on the debt-to-income ratio. The debt-to-income ratio is related to your total monthly debt to gross monthly income. The higher this number, the more difficult it is to receive financing. If a large portion of your income is going to pay off your pre-existing loans, you have to ask yourself if you can really afford to pay off another huge loan. If you are still paying off your auto loans, student loans, and credit card debts, or have a debt-to-income ratio of more than 43%, now might not be a good time to buy a house. If you don’t know and need some help, just reach out to us and we’d be glad to help you out with this.
You Can Afford a Down Payment
A down payment is a percentage of the total price of the home that you pay up-front. The number one hurdle that potential house-buyers face is this initial investment.
How much should you put down as down payment? The standard amount is 20% of the asking price of the house. This is the ideal percentage to keep your monthly mortgage check low and manageable. A 20% or higher down payment will also allow you to refinance your future home at a lower interest rate.
Being able to afford a healthy down payment shows your lenders that you are capable of saving, and that you are serious about your investment. This payment negates the need for private mortgage insurance (PMI), which gives your lender protection in an event where the buyer stops paying their mortgage.
Of course, there are dozens of loan programs available to you with a variety of down payment requirements, to include 0% down payments. So, to be certain, you should contact a Realtor or mortgage lender to discuss. We know some.
The 5 Year Rule
If you’re planning to stay in one place for at least 5 years, it’s a great time to buy a home. The reason is that this long-term commitment helps build equity. Actually, most people own their homes on average 7 to 10 years. So, 5 years is a great gauge to decide if you should buy or rent.
Equity is the difference between the appraised value of your house and the balance left to pay as mortgage. One thing to be aware of is mortgage amortization, which is how mortgage payments are calculated: how much goes toward paying off the principal amount, and how much goes toward paying the interest.
At the beginning, more of your payment goes towards paying interest than principal balance. But after making enough payments, as you get closer to paying off the remaining balance on your loan, more money will go to pay the principal amount rather than interest. Each month, equity on the house increases. Five years is a good benchmark to develop enough equity to sell your house for a profit, which may be used to make a bigger down payment on your next house.
Having funds for a down payment is one thing. Having emergency funds is another. Ensure you keep enough funds in your savings to pay for your monthly cost of living, to include potential mortgage payment for at least six months. This is to ensure you’re able to cover yourself in the event you lose income or discover a major repair required in your home. If you have this, you have a thick financial blanket to weather any temporary financial storm.
You CAN Afford All the Associated Fees
Home inspections, closing costs (an umbrella term that includes several costs like lender fees, title fees, home appraisal, and Escrow fees, etc.), moving costs, property taxes, home insurance, higher monthly utility bills, homeowner’s association (HOA) fees, along with maintenance, furnishing, and renovation expenses are all costs that many potential home-buyers overlook. Make sure that you have enough savings stacked up or income flowing in to cover these expenses. The last thing you want is to stretch yourself so financially thin you become what we call “house poor.”
Your Realtor should educate you on these fees early in the buying process so these should not become a surprise at the closing table. A good rule of thumb in Northern Virginia is to tack on an additional 3% to the sales price for your closing costs. For example, if you are purchasing a $500,000 house, plan for your closing costs to be around $15,000. We work hard to negotiate deals for our buyers in which sellers pay a portion of our buyers’ closing costs to help mitigate this front-end impact. Why? These closing costs are required to be paid the day you close on the home, they are not added to the loan and paid for 30 years, which is a common misconception.
Now that you know what to expect and that you are ready to buy, reach out to the Veterans Realty Group to get started today.