Is now your perfect time to buy a new home?
Despite the interest rate increase by the Federal Reserve, mortgage interest rates are still hovering around 4 percent. But before you start house hunting, it’s critical to assess your finances to determine what you can really afford.
Is now your perfect time to buy a new home? Here are 9 steps to help you decide:
Calculate your household take-home pay:
A projected mortgage payment should never exceed 25 percent of your combined take-home pay. Don’t calculate what you can afford based on your gross income. That puts you in danger of being house-poor. Be sure the payment estimate includes taxes and insurances, in addition to the principle and interest.
Use a mortgage calculator to make some estimates:
Currently, basic home mortgage rates are around 4 percent. Use this as a base to estimate the maximum you should borrow to end up with a payment of 25 percent or less of your take-home pay. Even though you will probably qualify to borrow more, doesn’t mean you should borrow more.
Check your credit score:
Typically anything above a 620 score will get you qualified for a mortgage but it’s not necessarily that straightforward. The score used by lenders is often the lowest of the three from the three major reporting agencies. Furthermore, the lower your score, the worse your mortgage interest rate. If you have a low credit score, you might do well to focus on paying off debts or showing a good payment record for about 6-8 months longer before applying for a mortgage. It could mean a saving many thousands of dollars over the life of a home loan.
Assess your down payment ability:
For a conventional mortgage, you’ll need between 5-20 percent of the purchase price, depending on the underwriting requirements. For an FHA mortgage, you’ll need a minimum of 3.5 percent of the purchase price. Of course, the more you can put down, not only the less overall you borrow but the lower the mortgage interest rate you’ll be offered.
Make sure you can cover closing costs:
In addition to the down payment, you’ll need additional funds for closing on a loan. These include but aren’t limited to, funding your escrow account (for property taxes and home insurance), bank or mortgage lender fees, title company fees, recording fees, and more. Talk with a mortgage professional to get a better idea of what costs you can expect.
Do you or the home qualify for a different type of mortgage?
If you are a military veteran, you could qualify for a VA loan through veteran benefits. If the home is in what is deemed a “rural development” area, you might be able to get a specialized loan with a zero-down payment and lower mortgage insurance costs. Talk to a mortgage professional to find out what might be available to you.
Consider the additional costs of a new place:
Before jumping to buy a different house, calculate additional costs you might incur. Will utility costs be higher? Will you have higher real estate taxes? Spend more on gas driving the places you go the most? Make sure your finances can handle all the cost differences, not just a new mortgage payment.
Will buying the home wipe out all your savings?
If getting into the home will take all the savings you have, you may not need to completely abandon the idea but you should immediately adjust your expenditures. You’ll not only need the down payment and closing costs but you’ll need money to get everything moved, start and end any utilities, and more. Adjusting the total you’ll borrow or what type of loan you choose can help make the home dream a reality, without leaving you without any money for a rainy day.
Meet with a mortgage professional:
If you’ve determined that it is the right time for you to get a new home, find a reputable mortgage professional. A good loan officer will explain how mortgages and interest rates are calculated, what you qualify for, and the maximum you should borrow. A good mortgage professional will never encourage you to borrow too much, nor will they be vague in explaining how your potential mortgage would work. If the loan officer isn’t willing to spend time answering all your questions and thoroughly explaining, find someone else.
One last word of advice… Never borrow based on income that could change. For example, don’t get a hefty mortgage based on two full-time incomes and be trying to have a baby at the same time. Change to your income and expenses is on the horizon and you could find yourself in over your heads.