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(From the Financial Literacy Blog) – Buying a home can be exhilarating and liberating. For many, it signifies the realization of the American dream. It can also be daunting or scary, with buyers likely taking on the largest debt of their lifetimes. Becoming a homeowner is a major decision and commitment, and while an individual’s financial situation plays a major factor, it’s not the only consideration to be taken into account. Here are five things people should ask themselves before buying a home:
Do I have a stable income?
One of the most important considerations people should account for is whether or not they have a reliable source of income. Having steady incoming funds is crucial in being able to make the monthly payments on a mortgage. Not only that, but a history of dependable income is often a deciding factor in whether or not a lender even agrees to offer a mortgage in the first place. Figuring out how secure one’s job or income is can be tricky to determine, but aspiring homebuyers should at least feel comfortable that their employment status and income is secure for at least the next few years. Not only should it be reliable, but a general rule of thumb is that total housing costs should not exceed 30% of the household’s take-home pay.
Is my credit in good standing?
Within the U.S. financial system, credit is the ability to borrow money to access goods or services with the understanding that the borrower will pay it back later. Before someone is granted any credit, lenders determine the borrower’s creditworthiness, or how likely they are to pay the money back in full and on time. Creditworthiness is represented by a credit score, which is a number between 300 and 850. The higher the score, the better one’s creditworthiness. Those with a low score may have difficulty qualifying for a mortgage. Those with a higher score will get better rates and loan terms, which can translate to substantial savings over the life of the mortgage. If someone has poor or fair credit, they may want to consider improving their score before buying a home. For tips on improving or establishing credit, people should read this brochure.
Do I have an emergency fund?
The monthly mortgage payment isn’t the only cost aspiring homeowners need to consider. Homeowners insurance, utilities, and taxes are regular costs that should be planned for. However, there are also costs associated with owning a home that aren’t as predictable. These unpredictable costs include repairs, which could be the result of a burst pipe, a shattered window, a broken appliance—the list of possibilities goes on and on. Someone could also find themselves suddenly out of work. Whatever the case may be, having an emergency fund can help people keep up with payments and make necessary repairs without falling into debt. A general rule of thumb is for people to have at least three months’ worth of living expenses saved away to cover emergencies.
Do I want to stay in the area long-term?
Before buying a home, people should determine if they see themselves living in that area for five or more years. Will their job remain in that area or is there a possibility they would need to move to maintain their position? If someone plans on starting a family, will the home provide enough space to do so? Experts recommend people stay in their purchased home for at least five years, which gives them a reasonable chance of breaking even on the purchase. Waiting five years would allow the home to increase in value enough to offset the closing costs, agent fees, and other expenses of buying and selling a home. If a buyer doesn’t think they’ll be in the same home for five or more years, they should think twice about making the purchase.
Am I ready for this level of responsibility?
Becoming a homeowner is a huge responsibility. People who purchase homes are likely taking on a large debt, are faced with maintenance and repairs, and often need to make sacrifices to make it sustainable. For example, if someone has aspirations of traveling for long periods of time throughout the year, they need to make sure they can still afford their mortgage payment. Just because they’re not at home, that doesn’t mean the monthly payments pause until they’re back. They also need to have someone check in on their home regularly. When someone becomes a homeowner, their list of responsibilities grows by quite a bit. If someone isn’t ready for more responsibilities, it may be best to wait on buying a home. However, for those who are ready, it can be incredibly rewarding. It can be a comforting space that people can take pride in, where they have freedom to tailor it to their wants and needs.
In short, if someone has a stable career, enjoys where they live, and understands all of the costs of owning a home, they might be ready to buy a house. However, they might want to think twice if they still have large amounts of debt, think they might switch careers soon, or don’t have an emergency fund.
If you have questions about funding homeownership, contact your local credit union.