Buying and owning a home is part of the American Dream. It’s an exciting time when you start to seriously include the possibility of buying a home in your life plans. Whether you are newly married, recently divorced, or just ready to purchase a place of your own, there are few things to consider before you make the move as a home is one of the largest, if not the largest, purchase in most people’s lives.
- Decide if you can afford to purchase a home first
Just as with most items you purchase, you want to be sure that you are in the right state financially before you make a commitment. Buying a home is a major expense and can be very dangerous if you don’t have the sufficient funds. The purchase is a long term decision with many unforeseen costs accompanying it. Fox Business proclaims that when deciding if you are financially ready, calculate the cost of the monthly mortgage payments you will pay for a home. These mortgage payments should not exceed 28% of your monthly net salary.
- Get a Mortgage Pre-Approval
Don’t start your house search only to find out that a home you really like is far out of the budget. Get a pre-approval quote before you begin looking so that you know what your budget for a home is.
- Be Sure You Have Enough Cash
With so much use of credit lines these days, many people are unaware that buying a home still requires a significant amount of cash up-front to cover closing costs and the down payment.
Frequently Asked Question: “Can I take out a personal loan to help with my closing costs?”
Answer: It is generally not advised to take out a personal loan to cover your down payment for two main reasons:
- Mortgage lenders (who are able to see your whole credit history) might see this as a sign that you don’t have the funds to make this purchase. This could outline you as a greater risk for a mortgage loan.
- When you take out another loan, you are adding additional debt and interest charges to your financial portfolio. Not only will you now have mortgage payments with your new home, but you will also have the personal loan and interest charges, which are generally higher.
One of the reasons that lenders have a down payment is so that the potential home-owner is also sharing the risk of this home investment. This portion of the risk that the home-buyer owns aims to deter individuals from abandoning their house and promise to pay. Think about the most recent housing bubble crash in 2008 in which there was virtually no risk to some home buyers and what transpired from this situation.
Nevertheless, if you are a single woman, this may be your only option to getting enough cash with your single income. We advise everyone to talk to a professional as each person’s circumstances are unique.
- The Down Payment is generally 20%
A frequently asked question is how much is a down payment for a home. While the most general amount for a down payment is 20%, many mortgage lenders require at least a 3% down payment. However, it may vary depending on your credit score/history, the type of house you are buying, and your reason for purchasing a home. Although mortgage lenders may offer you a minimum payment of less than 20%, if you make a down payment of less than 20%, you will generally be required to purchase mortgage insurance.
- Factor in Other Costs When Determining Your Affordable Mortgage Payment
When you are determining how much you can afford for your monthly mortgage payment, it is a good idea to add in other necessary expenses such as property taxes, HOA fees, and Home-owner’s insurance. You can even add in utilities if you would like since you must remember that utilities in a larger space will be much higher than you might be use to if you are leaving a rental environment.
It is important to factor these costs in as they are necessary to living in the house. If you believe you can afford a nice home with a large mortgage payment but conversely don’t have any money to pay the fees, taxes, and electricity, buying a home will not be in your best interest. If you are not financially ready to purchase a house, be patient and continue saving until your timing is more appropriate. Don’t forget that buying a home is a major purchase and should be done only when the time is right for you.
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Financial Sisterhood TM, 2016