I Want to Buy a House, Where Do I Start?
Are you diving into the world of homeownership? If so, congratulations! Buying a home is a huge decision that you should not take lightly. However, it is usually a smart decision, especially for those that have been previously renting. With rents rising across America, buying a home serves as an excellent way to save money month-to-month while building equity. But first, you need to know what you can afford. Here are some things to consider when first starting in the home buying process.
Do You Have a Steady Income?
The first question you need to ask yourself is whether or not you have a steady income. It is best to buy a house or apartment when you have maintained a regular income for a couple of years, and plan on keeping this job for the foreseeable future. This shows lenders that you can responsibly pay your debts, and illustrates how much you can afford to spend on a month-to-month basis. Usually, pay stubs and tax returns will be enough to show lenders your monthly income.
How Much Debt Do You Have?
Even if you have a steady income, large debts can make it challenging to secure a mortgage. Whether you have car loans, student loans, credit card debt and medical bills – keep in mind that these debts will offset your income, which may affect the final loan amount. It is best to work on paying off these debts as much as possible before starting the home buying process. This will also help your credit score!
-The 36% Rule
Taking the above points into consideration is the 36% rule. This rule states that a homebuyer should not spend more than 36% of their income on debts (this means ALL deficits – car, student loans, credit card debt and mortgage). Make a list of all your debt in comparison to your income. Be sure to include your spouse or partner’s financial debts/incomes, or whoever else will be on the mortgage. From here, you can determine how much of your income you are currently designating to paying off debt, and see how far away you are from that 36% number. This will help give you an idea of what percentage of your income will be available for a mortgage payment after accounting for your monthly debt obligations.
Do You Have Money Saved?
Usually, a down payment of about 20% of the home’s purchase price is recommended to get the best interest rate on a mortgage. There are, however, specific lending programs for which you may qualify to avoid putting 20% down. When beginning to think about a price range for your home, keep in mind what kind of down payment you would need to have saved up.
Helpful tip: even if you have enough money saved up to pay all cash for a home, financing a home may still be a better option.
Are you Familiar with Today’s Interest Rates?
Many factors affect and determine mortgage rates. Some factors, such as the economy, are out of your control. Some other factors, such as your financial profile, maybe more in your control.
Have you Used a Home Buying Calculator?
Our home buying calculator will help you calculate your monthly mortgage payment based on your loan amount, interest rate, loan term and other monthly fees that may apply to your home.