Owning a home is every American’s dream and it may be the biggest purchase one would ever have in his entire life. Preparation is very important and a lot of factors are to be considered, one of which is being financially prepared. You have to make sure that your finances are in order before even starting with the process, or you may end up being rejected on your mortgage application or being approved but eventually having the property foreclosed.

How would you know if you’re financially ready for a home purchase? When is the right time to buy a home? Here are some of the factors that you have to look into before deciding on making a purchase.

 

Down Payment

Most home loans require a down payment, which is a portion of the purchase price, with the exception of VA loans. Moreover, lenders would more likely approve of the home loan if the borrower can provide a down payment as they are trying to avoid the risk of default. The probability of default is higher for someone who did not put any money down as compared to someone who has put his savings into the property.

Down payments usually range from 3.5% to 20% of the purchase price. However, it’s best to save as much as you can since a down payment that is less than 20% will have a charge for private mortgage insurance (PMI) which will be added on your monthly mortgage payment. PMI (private mortgage insurance) is a type of mortgage insurance that would protect the bank in case the borrower stops paying.

 

Emergency Fund

Having enough money to use for emergencies is one essential step in financial stability. You should have an ample amount of money, at least three to six months of your basic expenses, saved which you can use in case of unexpected expenses like losing your job for example. These savings should not be used for regular or non-emergency related expenses. Do not rely on your monthly income to cover these unexpected expenditures.

 

Monthly Payments

Remember that there are a lot of fees associated with owning a house. The principal and interest are not only the costs that need to be considered as there are others like property taxes, insurance, HOA (Homeowner’s Association) fees, city assessments, and the like. You have to have a budget and consider if you could afford to buy a home. Try to keep your monthly payment to around $25% of your take-home pay, or not more than 35% including all home-related expenses like utilities. Be realistic about what you can afford.

 

Debt

Considering how expensive buying a house is, having some debts, especially those with high interest is one possible hindrance on your home purchase. Having too much debt may disqualify you from getting a mortgage. Banks need an assurance that you can pay them back and this will be determined based on your debt to income ratio, which should not be more than 43%. Any outstanding debt, be it for credit cards or car payments, should’ve already been settled before you decide to purchase a home. The money that you spend for the payments of your debts can, therefore be allotted towards your emergency savings.

Moreover, some banks may tell you that you can afford the payments but it doesn’t necessarily mean that you really can. Since most banks rely on debt to income ratio in determining your qualification for a mortgage, there may also be some factors that need to be considered and that they are not aware of.

 

Stable Job

Depending on how long you’ve been on your current job, may determine its stability. The longer you’ve been on that position, the more that it would be viewed as stable. Finding that job that you can keep would somehow ensure that you’ll be staying on that house longer.

 

Credit Score

Your ability to pay your bills as well as your overall debts affect your credit score. Furthermore, the better your credit score is the more ideal the interest rate hence, the lower the monthly mortgage. If you maxed out your credit cards or is consistently late on paying your bills, you’ll have a low credit score which will impact your chances of getting financing. Likewise, collections, bankruptcy, and foreclosure will have the same negative impact on your score.

If you have a bad credit, buying a house may not be the best option for you.

In conclusion, buying a home may not be as simple as it seems. Though every family aims to have a home of their own, homeownership may not be for everybody. If you think you’re ready, you have a stable job, enough savings, good credit score, and little debts, then owning a home may be right for you!