Home inventory might still be a bit low, and prices are creeping up, but it’s still a great time to buy a home. If you’ve been paying attention to mortgage news, you know it’s getting easier to get a home loan, which is great news for buyers. But, before you jump into the market, there are a few practical questions that home buyers should ask themselves.
How much home can I afford?
Being ready to buy a home doesn’t just mean your sick of living in that rental. It means you’re financially prepared to pay a mortgage and all the other expenses that come with maintaining a home and home ownership.
A new home will probably be the biggest purchase you ever make and it involves some level of commitment, so it’s important to make sure you understand how much home you can afford. Many lenders suggest that buyers not spend more than 28% of their income on a home. Using a loan calculator can help you decide how much of a mortgage payment you can handle.
Keep in mind that a typical down payment will be 3.5% of the home’s cost. That’s what it takes to secure an FHA loan at the moment.
Do I have good credit?
Have a good credit score is important for getting qualified for a loan. Good credit can make the home buying process go much more smoothly. Being pre-approved for a loan when you make an offer on a house will give you an advantage in this tight market, and having good credit will help you secure that pre-approval. Further, the higher your credit score, the lower your down payment requirements will be, making it advantageous to improve your credit score if necessary before buying a home.
If you need to improve your credit score, there are programs out there to help. You can also improve your credit by paying bills on time, not applying for more credit and by keeping old cards open and inactive instead of canceling accounts.
If you aren’t sure what your credit score is, pull your report. A credit score of around 650 is good, but up over 700 would be better.
Is my savings account in good shape?
Your home is an investment, and that means you’ll need to put money into it to keep it up. While people dream of owning a home, they have nightmares about replacing the furnace overnight when it’s 20 below zero when they don’t have adequate savings. Homes often come with unexpected costs and expenses that cannot wait.
A good general rainy-day rule is to have six months of expenses saved up. That holds true of home owners. That doesn’t mean you need to have that money in cash, but having funds to cover emergencies and maintenance on your home is an important part of keeping home ownership financially comfortable.
It’s a great time to buy, but it’s never a good time to buy if you aren’t prepared financially. Your new home is exciting and making sure you can afford everything that comes with it will help you relax and enjoy it.