Are You Financially Ready to Own a Home?

Posted on September 12th, 2011 by admin

With home prices continuing to fall and interest rates at record lows, many renters are wondering if now is the time to jump into the real estate market and buy a home. While its tempting to buy when homes seem to be “on sale,” a favorable market is not the only factor relevant to whether you are ready for home ownership. If you are not financially prepared to be a homeowner, you could find yourself faced with serious financial struggle.

The Financial Side of Buying a Home
When you are considering buying a home, there are several essential steps to take in order to make sure that your finances are in order. Before considering purchasing a home, you need to:

Check your credit score. A credit score over 720 or so should qualify you for the best rates. If your credit is low, consider taking some time to build your score by paying off debts and making payments on time before you buy a house. A low score can lead to a higher interest rate and a more expensive mortgage over the life of your loan.
Consider your job status. Banks and mortgage lenders like to see that you have been in the same job for a while and that you have a reliable source of income. For the self-employed, this requirement is usually more stringent, with most lenders requiring at least 2 years of tax returns before they’ll count income you earn.
Have a healthy down payment. Today, most banks and lenders require that you put down at least 20 percent in order to qualify for a home loan. While you may be able to find a lender that will let you put down less, you will have to pay something called PMI (private mortgage insurance) if you borrow more than 80 percent of the value of the home in a single loan. You also take a risk if you don’t have a down payment because if property values continue to decline, which is a real possibility in an uncertain real estate market, you could find yourself under water and unable to sell if you need to.
Have an emergency fund: Home ownership can come with a host of expenses you don’t have to deal with as a renter. When the furnace breaks, the pipes burst or the roof needs replacing, the money for this comes out of your pocket. An emergency fund can provide you with the cash you need for unexpected expenses and can also be used to pay your mortgage if you end up out of work or unable to pay your bills for a period of time.

Living Like a Homeowner
If you believe your finances are in good shape and that buying a home is right for you, it is a good idea to actually practice making your mortgage payment before you have to make it. In other words, if you are considering buying a home that will have a $1200 a month mortgage payment, you should pretend you have to make that payment before actually buying a home. If your rent is only $800, for example, then set aside the extra $400 each month. You can use this money to build up your down payment or your emergency fund and you can see if you can really fit the mortgage payments comfortably into your budget.

If you are able to make your “mortgage payment” for a few months without feeling a pinch in your pocket book, and if you have carefully evaluated all other aspects of homeownership including your financial readiness and your long and short term goals, then now can be a great time to jump into the real estate market.

Author: Christy Rakoczy writes about PPI claims and bank charges at www.PPIRefundsUK.co.uk a UK based mis sold PPI reclaim website in the financial claims sector. Christy also writes about personal finances, mis-sold mortgages, unfair loan agreements and credit rating advice.

Share and Enjoy: