Rushing into a home purchase when you’re unprepared can be a recipe for disaster. Before you take the plunge, think long and hard about your financial circumstances to figure out if now is the right time.
Consider Your Debt-to-Income Ratio
Lenders will consider your debt-to-income ratio when deciding whether to approve you for a mortgage. If you currently have substantial credit card balances, auto or student loans, or other debts, you might not qualify for a home loan. Even if you do get approved, the total debt load can be overwhelming. It might be wise to pay down your current debts before taking on the burden of a mortgage.
Review Your Credit Scores
Lenders use credit scores to figure out whether an applicant is likely to make mortgage payments on time each month. If you have a low score, you might only qualify for a loanwith a high interest rate, or you might not get approved at all. Delaying a home purchase to improve your credit can help you qualify for a mortgage with a competitive interest rate, which can save you tens of thousands of dollars.
Figure Out How Much You Can Afford to Put Down
If you take out a mortgage, the percentage you’ll have to put down will depend on the type of loan you choose. Making a substantial down payment can reduce the amount you’ll have to borrow and keep your monthly payments affordable. If you take out a conventional loan and put down at least 20%, you’ll be able to avoid paying for private mortgage insurance. If you don’t have substantial savings, it might be in your best interest to delay a home purchase so you can save more.
Consider the Total Cost of Homeownership
Buyers often get into financial trouble because they focus on monthly mortgage payments but don’t factor in other expenses, such as homeowners insurance, property taxes, maintenance, and repairs. When you consider all the costs associated with owning a house, you might realize that it’s beyond your reach.
Think About Your Other Goals and Priorities
Even if you can get approved for a home loan, you might not be able to afford a house. Mortgage lenders will look at several aspects of your financial picture, but they won’t consider everything. For instance, it’s likely that you’re saving money for retirement, a new car, or a vacation. You might have other monthly expenses, such as childcare, or you might provide financial support to an elderly parent. You know your financial situation and goals better than anyone else. Think about everything you spend money on and ask yourself if you can realistically afford a house right now.
Be Prepared for Things to Go Wrong
You don’t know what the future holds. Your house might need major repairs, you might lose your job, or a family member might have expensive medical bills. Before you buy a home, you should have enough money in an emergency fund to handle those sorts of setbacks.
