Don’t let the terms “Buyer’s Market” or “Seller’s Market” be your guiding light when choosing to buy a home. The time to buy a home depends on YOU.
If you don’t have a household budget, start one now. You won’t know how much mortgage you can pay for until you evaluate your income vs expenses like revolving debt, utility expenses, food, gas, etc. After you’ve found out how much extra you have at the end of the month (and trimmed waste as much as possible), you’ll start to have an idea of how much per month you’ll be able to afford.
A mortgage payment is more than just the price of the house. It includes the principal of the loan (the price of the house), the interest of the loan (based on the rate of the loan), money set aside for escrow to pay for recurring fees such as homeowner’s insurance and property taxes. It could also contain mortgage insurance for borrowers who purchase with less than a 20% down payment. All those variables can change daily, so consult with your bank to get an idea of how much house you can afford.
Most banks require a full 20% of the price of the home to get a loan. For a $200,000 home, you’ll need a $40,000 down payment. Banks offer lower down payment loans, but those often come with higher mortgage rates and added mortgage insurance which protects the bank from higher-risk borrowers. If you don’t have 20% or more to put down on a home, the added rates and fees will cost you more in the long run.
Although no one can forecast the future, having a stable income makes your household budget predictable and makes you a less risky borrower to banks. If you’ve been at a job for more than 2 years and don’t have a history of short term employment, then you’ll be a candidate for favorable mortgage rates. If you’re fresh out of school, have a history of unemployment, or foresee your career changing directions soon, you may want to hold off on buying a home.
It’s also important to have an emergency fund in your savings account. The current recommended minimum is 6 months worth of reserve funds to cover all expenses in the event you lose your income. Anything less than that is risky.
Having a household budget is the foundation for knowing your overall financial health. At a glance, you’ll be able to see your income and your debt. Banks want to see this too, and they prefer home loans that do not consume more than 33% of your income and the rest of your debt is under 38% of your income. Keeping those ratios in mind, if your debt is more than 71% of your income, you are not ready to buy a home. It’s a good idea to pay off short term debt like auto payments and credit cards, and avoid taking on new debt 6 months prior to applying for a mortgage.
Your credit score is a reflection of your debt management. You don’t have to have perfect credit to buy a home, but you should be able to display a history of prudent financial management. Your credit score will influence the mortgage rate you qualify for. For example, if a bank is advertising 30 year mortgages at a rate of 4.125%, you are not guaranteed that rate unless you have an “excellent” credit score. A “good” credit score may bump your qualified rate up a couple tenths of a percent. You can check your credit score for free at AnnualCreditReport.com. If you see any discrepancies, you can contact each credit agency to get them addressed.
The buying and selling process have costs associated with them. If you sell your new home within 2 years at about the same price you purchased it for, you may lose money because you haven’t recouped the costs associated with buying the home. If property values went up and you sold your house for a profit within the first 2 years, you will be hit with capital gains taxes. If you plan on being in the home for more than 3 years, then it may be time to buy.
You must also be committed to the property. There will be roofs to replace, broken windows to fix, siding to repaint – the list goes on and on, year after year. If you don’t have the time, money, or skills for home upkeep and enhancement, you might not be ready to buy yet. Letting a house go into disrepair can cause a cascade of issues that will cost much more in the long run and make reselling very difficult.
The easiest way to get pre-qualified is to go to your current bank and ask them for a pre-qualification letter. It’s a simple process that will let home sellers know that you are a qualified buyer. The bank will evaluate your income to debt ratio and provide a limit on how much they will loan you for a mortgage. This figure should fall within the ballpark of your estimated home budget based on your household budget. Most banks will qualify you for more than what your budget says you can afford. Trust your personal budget. If your budget says you can afford a mortgage for a home that costs $200,000, but the bank is willing to loan you $250,000, it is financially prudent to stay within your budget. That’s free financial advice from Coldwell Banker Plaza Real Estate!