Home ownership is highly sought after in our society. Lots of people associate it with the ‘American Dream’ and it’s often seen as a major accomplishment. The common myth that all homeowners are well off financially or have a lot of money is just not true as much as I’d like it to be.
Some people purchase homes to escape renting only to find out the grass is not so greener on the other side. Owning a home really can be a dream come true if you prepare properly and realize all the financial factors and responsibilities that tie in with home ownership.
On the other hand, the process of purchasing a home can be hectic and anything but liberating if you aren’t prepared. If you think you’re ready to buy a home, here a five questions to consider before taking that big step.
How Secure Is Your Income?
Lenders will definitely check your bank account and pick through your work history before approving you for a loan. However, only you truly have the best understanding of how secure and reliable your income is. If you quit your job or get laid off, you will still be required to make mortgage payments and pay for other expenses related to your home.
If you have a dual income household, it will certainly help make your income more secure if anything unexpected happens but either way, it’s important to have a backup plan. Dealing with foreclosure can be a nightmare and pretty embarrassing. It’s important to lower and even try to eliminate that risk as best as you can before purchasing a home so you can have peace-of-mind and enjoy home ownership to the fullest. Having a large amount of savings, living well below your means and diversifying your income will help make it more secure so that you can continue to pay off your home for years to come.
Are You Comfortable With Your Emergency Fund?
Establishing a large emergency fund will help you be more financially stable and help fund unexpected repairs and expenses related to your home. Just like everything else, homes endure wear and tear and need to be repaired and maintained. Home maintenance can cost a lot of money so you should have anywhere from 6 months to 1+ years’ worth of expenses saved up.
Bankrate states a good rule is thumb is to anticipate spending an average of 2.5 to 3 perfect of your home’s value on upkeep.
No matter how long it takes, make sure you have enough savings in the bank to be able to handle the unexpected without having to rely on loans or credit to solve an issue. If you find out that you need your roof replaced or a new water heater you don’t want to have turn to your credit cards and rack up more debt. Mortgage debt is enough on its own. As a homeowner, a large emergency fund will run to the rescue and protect the rest of your money time and time again.
Will Purchasing a Home Make You ‘House Poor’?
A good rule of thumb is to never try to purchase a home that is more than 3 times your annual salary. A housing rule in general is to never allow your monthly housing related expenses to be more than 30% of your income. People who spend more than 30% of their income on housing related expenses each month or purchase homes that are 6 or 7 times greater than their annual salary are commonly referred to as being ‘house poor’.
House poor means you may have a nice home, but you can barely afford it and you’re living way above your means. People who are house poor usually live paycheck to paycheck and can’t spend money on other activities and experiences they value due to their extremely high mortgage and utility bills that take a huge chunk out of their income. Who wants to have a beautiful expensive home that they can’t even enjoy because they’re too busy working day and night to pay the bills?
In order to avoid becoming house poor, you’ll need to be realistic about how much home you can afford and not the maximum amount the bank tells allows you to borrow. In some instances, it might just make financial sense to start with a fixer-upper. Try to settle down in a geographic location with a lower cost of living. Even choosing to live 20 minutes further away from a large city can make a big difference in terms of housing prices.
Do you have 20% Saved for the Down Payment?
It’s very possible to obtain a home without a 20% down payment but it isn’t recommended from a financial standpoint. Putting down 20% makes you less of a risk to the lender and helps prove to them and yourself that you can pay the remaining 80% throughout your loan term.
Putting down less than 20% will subject you to paying private mortgage insurance in addition to your monthly mortgage payment. You may be able to qualify for an FHA loan that won’t require you to put 20% down but those loans may require you to pay insurance as well each month and the more money you have to put down is always better.
Are You Prepared to Cover Closing Costs?
Buying a home is such an expensive process. In addition to saving up money for emergencies, and the down payment, you’ll also need to be prepared to cover closing costs. On average, closing costs can make up 2 to 5 percent of the purchase price of a home. Depending on how much the home costs, those numbers can really add up.
Closing costs include prorated interest, insurance, lender fees, escrow account, title fees and appraisal fees just to name a few. It’s definitely an expense that most potential buyers tend to forget about or underestimate. The last thing you want to do is stress out over paying for closing costs or depend on your loan to help cover those expenses.
If you are interested in becoming a homeowner how are your preparing? If you currently own a home, what else would you add to this list?