There is a pride to home ownership, however there are some cases where you must look at the entire picture of your situation and decide if renting may be better than buying at the current time. While many people may feel renting is a waste of money sometimes buying can also prove to be a waste of your money if you cannot sustain the payments you acquired at the time of purchase and in turn face financial stress and the possibility of losing your home and the previous months payments you’ve already invested. With this in mind it’s a necessity to evaluate your finances, job stability and current situation in order to determine if the time is right to venture into such a huge investment. Start by asking yourself the following questions.
How Much More Debt Can I Afford?
Most experts agree that your total monthly debt payments shouldn’t exceed 36% of your gross monthly income. This is a good starting point, and over time if you can reduce that number you’ll be in pretty good shape. Therefore you should start by writing all of your debts and see exactly how much of your gross monthly income is being taken up by your current debt. If this proves to be less than 36% then you can add that to the pros of purchasing a home. This is considered calculating your debt to income ratio and is taken into consideration by lenders when deciding to approve you for a loan.
How Much Should I Have Saved?
You should definitely have an emergency fund. This is a fund used to cover expenses when there is a sudden loss of income or other financial emergency. Most suggest a household have between three and six months worth of expenses available in the event of an emergency. So, if your monthly obligations total $2,500, you should try and keep between $7,500 and $15,000 in your emergency fund.
How Much Will I Have To Put Down?
Putting something down on your home is very important, no matter what terms your lender offers. It should be noted, however that if you put less than 20% down, your lender will require you to have private mortgage insurance (PMI). This is required by banks to make certain that they are not left empty-handed should you default on your mortgage. PMI can add hundreds of dollars to your yearly payments. Therefore, if you are trying to save money by not putting at least 20% down you may really be costing yourself more in the long run due to the cost of the insurance.
In any case, after you have decided how much of a mortgage payment you can afford it is best to calculate at least a 20% down payment into the total purchase price of the home. This will assure that you will have the monthly payment you desire. Also when preparing for the total amount of expenses that will be required of you it is imperative to take into consideration closing costs. Sometimes the seller will pay all or a portion of your closing costs. However, if you are required to pay the closing cost it is usually in a range of 2%-3% of the sales price. This should also be remembered when deciding on the amount of your down payment and how much you can afford to come out of pocket with.
Once you have carefully examined all of these factors it is now time to present them to a lender so they can use those figures to determine your ideal homes price range.
Photo: Allard One
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January 20th, 2009 at 12:39 pm
Another good post. Also, everyone should keep in mind the maintenance that comes with homeownership. I bought my first home in October 2006, and really had no idea of the true “additional” expense and time required to simply maintain the home.
If a buyer has the emotional and financial wherewithal to make that leap into their first home, now is certainly a great time for buyers!