Are you planning to buy a new home soon? Purchasing a house is one of the significant financial decisions you will make in your life, and there are things you need to consider before making a purchase. One is if your income is enough to pay for a house.
Buying a house is a decision that’s not easy to make. The location, space, and the number of rooms are not your only concerns. The financial considerations have the most impact on your decision-making process.
Let’s face it! A home purchase is never cheap. Only the rich can afford a house. But then again, even most of them won’t pay for one in cash.
Why would someone with enough cash buy a house with a mortgage? Because of low mortgage rates, tax-deductible interests, and potential investment elsewhere. But for most people, many can’t afford to buy a house in full.
It is why many choose to postpone a home purchase. Planning on buying a house soon? Here are the essential considerations to keep in mind before buying a house.
Are You Ready To Reside In A Single Location?
Owning a house is indeed a rewarding experience. However, buying a home is not just a financial commitment. It also involves choosing to stay in a location for a long time.
Ask yourself – do you like moving and traveling a lot? Do you This is also true for people whose work requires frequent relocation.
Make up your mind about staying for at least five years. According to experts, this is the 5-year rule in buying a house. It is to ensure you don’t take a couple of financial hits.
Not sure about staying for the long-term? Then a home purchase may not be for you yet.
The Amount of your Existing Debt
A home purchase involves a considerable amount of investment. More often than not, buying a house involves taking out a loan. If this is the case, you need to apply for a mortgage.
Getting a mortgage won’t only add into your debts. Applying for one can be hard because not everyone is qualified for a home loan.
Getting a mortgage means owing additional thousands of dollars of debt. Already struggling to pay your existing loans? Then taking on another huge debt may not be the best idea.
It would be best to pay most of your debts before buying a house. Also, avoid opening new credit accounts. This way, you get to qualify for a mortgage.
Paying off your other loans and credits will lessen your financial burden. You get to pay for your future house easily. Plus, you can save more money in the process.
How Much Of A House You Can Afford
When buying a house, it would be best to overestimate the costs. Why? Because most homebuyers will tell you their homes costs more than planned.
It’s not enough that you check your savings and estimate your budget. Aside from the home purchase price, there are other expenses to consider, such as your monthly fees, debt payments, emergency funds, etc.
Your Willingness To Pay For A Mortgage Application Fee
Plan on buying a house by getting a mortgage? Take note that some lenders require a mortgage application fee. Lenders use this to start processing your home loan application.
This one-time upfront fee charged to mortgage borrowers is usually non-refundable. Most of the time, online lenders require the lowest application fee. Make sure to compare rates and shop for lenders before paying.
It may not seem much. However, this posts as a risk for borrowers with low credit scores. The reason is that it low-credit-quality borrowers may face loan rejection.
Your FICO Score and Credit Report
Mortgage lenders use your credit score to evaluate your credit risk. The higher your score, the better your chances of getting approved for a home loan.
Good Read: 7 ways to improve your credit score
Your credit history also matters when applying for a home loan. This tells lenders your attitude when it comes to paying your debts.
Some home loans require you to have at least 580 credit score. Others require a FICO score as high as 640. The credit score requirement is dependent on the loan types.
Improving your score and cleaning up your history is essential. One can do this by paying off credits on time. It also helps to limit credit requests and keeping balances low.
How Much of a Down Payment You Can Afford
Some home loans even allow down payments to be gifted. If lucky, you can also get a mortgage without any down payment. This is especially true if you qualify for a VA USDA loan.
Many institutions offer low down payment programs. For first-time home buyers, one can avail 3.5% or less down payment. For other loans, the deposit can go as high as 20% down.
This is why it is essential to save up for a down payment. The higher you get to set aside for the down payment, the better. Here are some of the perks of saving up a higher down payment.
enjoy a lower monthly mortgage rate
minimize risk against price declines
eliminate the need to pay for mortgage insurance
get the best mortgage rates and terms
better chance of getting approved for a mortgage
pay off your mortgage faster and easier
Can Your Afford The Closing Costs
Buying a house with a mortgage requires you to pay the closing costs. That’s right – it’s not just the down payment and mortgage insurance. One needs to pay for the closing costs to complete the transaction.
The closing cost is dependent on your loan type, state, and lender. This usually costs about 2%-5% of the purchase price. It is not listed in the purchase price.
Can You Afford Property Taxes
When renting a home, your landlord is responsible for paying property taxes. All that will change after you buy a house. Even after paying off your home, you still pay for property taxes.
The local government is the one who calculates the property tax. This is based on the value of your real estate. The government uses this as a major source of funding.
It can be part of your monthly mortgage payment. You can also choose to pay it annually or semi-annually. Local Tax Authorities accept and record your property tax payment.
Can You Find Affordable Housing In Your Desired Location?
Choosing a location is critical when buying a house. Why? Because this is the place where you’ll be residing for years.
For example, you want your new home to be in London, Canada. Can you find affordable housing in that area?
Keep in mind that home prices vary from one place to another. The price range for a three-bedroom home in different states can vary. Know your budget and try to find one within your budget.
Can You Afford a Homeowner’s Insurance?
Buying a house with a mortgage usually involves a homeowner’s Insurance. Even if you pay it in full, you can own a home without Insurance. However, it’s best to have some coverage in case of unforeseen circumstances.
For most mortgage lenders, Homeowner’s Insurance is a requirement. In the US, $1,083 is the average homeowner’s Insurance. The amount you need to pay will depend on the following factors.
Location (proximity to fire stations, prone to theft or is often exposed to extreme weather)
Home characteristics and features (age of the house, wiring, structure type, etc.)
Claims History (higher premium if you have home insurance policy claims history)
Protective Devices (lower insurance rate for homes with more protective devices like smoke detectors, burglar alarm, deadbolts, etc.)
Homeowner’s Insurance gives you some protection and peace of mind. Having the right premium helps you avoid risks against unforeseen events.
Are You Ready For Repair And Maintenance Costs?
Buying a house meant paying for everything that concerns your property. This includes home repairs, maintenance, and home improvement projects.
Recommended Read: How to Budget for Home Maintenance Costs
Failure to maintain your home is like putting your investment to waste. This is why repair and maintenance is the responsibility of a homeowner. The costs vary and can be cheap or expensive, depending on the project.
Will Your Home Purchase Affect Your Ability To Save For Retirement?
There are many mistakes homeowners make when buying a house. One is exhausting your resources to fund a home purchase. This could mean using all your savings, even your retirement, and emergency funds. If you already own a home but are looking for a way to use its value for additional cash in retirement, an equity release in the form of a loan could be a serious consideration; you can use a retirement loan for almost any reason including care which is a comforting thing to note for anyone reaching retirement age.
Sometimes, it’s best to rent than to buy your own home. You get to save yourself from the true of homeownership.
Owning a house meant you pay not only your monthly bills and expenses. It also means you need to invest a considerable amount of money. Will it be a hindrance of your capability to save for retirement?
If your answer is yes, then it would be best to postpone, and it might be worth taking a look at the top 9 retirement considerations before making any big purchases. Can you afford to save and still pay for the monthly mortgage? Then maybe you’re ready to buy your own home. Eventually, once you’ve bought your house, you could consider a lifetime mortgage when you’re getting older. This allows you to borrow money and still own the house, with the loan being repaid when you pass away or move into a care home. To see how the types of lifetime mortgage work, you could contact a lifetime mortgage adviser.
A home purchase is a significant financial investment. Check your finances, consider your income, and weigh in your options. Before making a home purchase, keep these things in mind.
Sarah Smith is a freelance writer and backpack traveler. One of her goals is to visit every country in Asia and learn about different cultures. During her free time, she helps her friends find affordable housing and places to spend their weekend.