Buying your first home is an exciting time, but if you jump into a buying decision prematurely, or start looking at houses before you’re ready, it could hurt you in the long run. The best approach is a thoughtful, conservative one; take your time considering your current position and considering your home buying options, and move forward only when you feel you’re ready.
You can begin this process by making several calculations to determine whether you can afford a home, how much home you can afford, and how you’ll need to budget in the future.
Calculations To Make Before Buying a House
These are some of the most important calculations to make before you move forward with your home buying decision:
1. Your current income.
How much are you currently making? If you’re in a solid position with a steady, salaried income, this is an easy calculation to make. If you’re self-employed or if your income is variable, this may be a bigger challenge. How much income can you count on, no matter what? What’s your average monthly income? How might this change in the future?
2. Your current monthly expenses.
You’ll also want to look at your current monthly expenses. What are you currently spending on things like groceries, health insurance, car insurance, fuel, and entertainment? These will help you form a budget, and understand how much extra income you have to work with. Are there any cuts you can make? Are there any major expenses standing in the way of you saving money for a down payment?
3. Your debt-to-income ratio.
Your debt-to-income ratio, or DTI ratio, is a measure that compares your total monthly debt payments to your monthly gross income. If your DTI is higher than 43 percent, you may have difficulty getting a mortgage. Even a DTI of 36 percent or more can make things difficult for you. Ultimately, you’ll want to strive for something lower.
4. Your credit score.
What is your current credit score? This is a financial measure of your trustworthiness that you should know at all times. Generally speaking, the higher this number is, the better; higher credit scores will increase your likelihood of qualifying for a mortgage, and possibly grant you more favorable rates and terms. If your credit score is in “fair” or “poor” territory, you may want to work on increasing it before buying a home.
5. A potential mortgage, with several variables.
Next, you’ll want to consult several different mortgage calculators and play with the variables to see what your monthly payments might be like. For starters, you’ll want to see what your loan might look like with different borrowed amounts (and different down payments), different interest rates, and different terms. If you qualify for a special type of loan, like a VA loan or FHA loan, you’ll want to use a different set of numbers. This should help you determine how much home you can truly afford, and what types of loans to look for.
6. Your path to saving a full down payment.
Most lenders require you to front a down payment of at least 5 percent. Through a special program, however, you may be able to put as little as 3 percent down. If you want to avoid extra costs from private mortgage insurance (PMI), you’ll need to put 20 percent down. Figure out how much of a down payment you want to provide, and how you’re going to save it—can you cut costs? Can you increase your income?
7. Home insurance.
How much is home insurance going to add to your monthly payments? Is there a way to get a lower rate?
8. Property taxes.
Calculate property taxes for a home in your budget in different areas near where you want to move. You can usually find property tax rates on each city’s website.
9. Utilities and other costs.
Don’t forget, you’ll also be paying for utilities when you move into a home. How much will you pay for things like gas, electricity, and water in this new area?
10. Property value changes in the area.
How have property values in your target area changed over time? Are they on an upward trajectory? Is there a chance that prices have peaked, or that a bubble has formed?
Other Factors to Consider
If all the numbers seem to check out, you’ll next want to consider whether this is the right time for you and your family. Buying your first home is an incredibly exciting experience—and one that will bring your family closer together—but you’ll enjoy the experience even more if you’re feeling confident about your decision to move forward.
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This content is sponsored by Larry Alton.
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