As you consider whether you’re financially ready to own a home, it’s important to take a holistic look at your current financial situation. Before you start working with a broker or lender, here are five key calculations and questions to keep in mind:
- Evaluate your expenses and savings: Take stock of your current expenses and debt payments, and compare them to the amount you have saved or invested. This will give you a sense of your overall financial health, and help you determine whether you have the financial cushion you’ll need to take on the responsibilities of homeownership.
- Determine what you can afford: It’s important to consider how much you can afford to spend on housing each month without putting your financial health at risk. This will depend on your income, expenses, and savings, as well as your debt-to-income ratio (DTI). Your DTI is the percentage of your monthly income that goes toward debt payments, including your potential mortgage payment. Most lenders prefer a DTI of 43% or lower.
- Calculate upfront costs: In addition to your monthly mortgage payment, you’ll need to be prepared for a variety of upfront costs associated with buying a home. These can include the down payment, home inspection and appraisal fees, insurance costs, land registration fees, prepaid property taxes or utility bills, legal or notary fees, potential repairs or renovations, moving costs, and taxes on a newly built house or mortgage loan insurance. Make sure to factor these costs into your overall budget.
- Estimate monthly homeownership expenses: In addition to your mortgage payment, you’ll need to budget for ongoing homeownership expenses such as property taxes, utilities, maintenance and repairs, and insurance. Make sure to factor these expenses into your overall budget to get a clear sense of what your monthly housing costs will be.
- Check your credit score: Your credit score is an important factor in your ability to qualify for a mortgage and get favorable terms. You can obtain a copy of your credit report to evaluate your credit score, and make sure there are no errors or issues that could impact your ability to get a mortgage. Make sure to address any issues with your credit score before you start the homebuying process.
By taking these five calculations and questions into account, you can gain a better understanding of whether you’re financially ready to own a home. This will help you make a more informed decision about your homebuying journey, and set you up for success in the long run.