There’s no sugar-coating the enormity of your first home purchase: it’s a big decision. Yes, you will likely be locked into a 30-year mortgage, and yes, anything that happens to that home – pipe leaks, weather damage, sewer problems – is your responsibility. A mortgage is likely the biggest single expense you will ever incur. Before you enter into a contract, you need to know with certainty that you will be able to handle the monthly payments, including fees and homeowners insurance.
Determining mortgage limits
The Federal Housing Administration typically uses a debt-to-income ratio rule when approving or declining mortgages. Typically, the FHA requires that your debt payments – which includes your mortgage – account for no more than 43 percent of your monthly gross income. Think about any future debts you may incur to ensure that you will still be able to cover your house payment.
Review your savings
You’ll need to make a down payment on your new home, which can range from five to 20 percent of the home’s value. But after the purchase, other expenses are sure to come up. Be prepared to pay for maintenance and repairs.
How much, exactly, can depend on a number of factors, including the cost of the home, its current condition and your income level. A financial adviser may provide more insight into how your finances fit into this picture.
If you don’t feel that you have enough money saved up to buy a home, consider saving money while renting a home. Renters insurance is often significantly less than costs associated with homeownership, and when you rent, your landlord handles home repairs.
Consider your credit score
If you don’t already know what your credit score is or what it means, find out before you consider buying a home. Your credit rating may affect your mortgage interest rate, and a little difference can produce a big jump in costs over the life of the mortgage.
Paying your bills on time, paying off bad debts and reducing your overall debt-to-income ratio are great ways to boost your credit score and better position yourself for premium mortgage interest rates.
Plan on staying put
Buying a home isn’t a short-term decision. Selling a home shortly after you buy it typically costs more than whatever you might make from the sale. Most experts recommend not buying a home unless you know you will be there at least two years, but the longer you stay in the house, the more beneficial it will be financially.
These tips address some of the most basic considerations when buying a home. Plan to exercise patience and spend about a year preparing to buy a home. The more planning you do beforehand, the more likely you will be to find yourself in a comfortable financial situation with a prime mortgage rate and a home offering room to grow.