Things To Know Before Buying A House – If you feel like you’re ready to buy a home, the first question you should ask yourself is, “How much can I afford?” Answering that question means looking at a number of factors.
Before you grab a seemingly great deal on a home, Learn how to analyze what “affordability” means. A variety of factors need to be considered, from debt-to-income (DTI) ratios to mortgage rates.
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The first and most obvious decision is money. If you have enough means to purchase a home with cash, Now you can definitely afford to buy. Although not paid in cash. Most experts agree that if you qualify for a mortgage on a new home, you can afford the purchase. But how much of a mortgage can you afford?
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The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages. This ratio determines the borrower’s monthly payment. Depending on the real estate market and general economic conditions, some lenders may be more lenient or strict.
43% DTI means your regular debt payments plus your housing expenses—mortgage, mortgage insurance; Homeowners association fees; property tax; Homeowners insurance, etc.—should not exceed 43% of your gross monthly income.
For example, If your gross monthly income is $4,000; If you multiply this number by 0.43 to get $1,720. This is the total amount you should spend on debt payments. now, You already have these monthly obligations: a minimum credit card payment of $120; $240 in car loan payments and $120 in student loan payments—a total of $480. That is, in theory; That means you can afford up to $1,240 a month for an additional loan on a mortgage and stay within the maximum DTI. Less debt is always better.
Mortgage loan discrimination is illegal. race Religion sex marital status, use of public assistance; Nationality If you believe you have been discriminated against on the basis of disability or age. There are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
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You’ll also need to consider the front-end debt-to-income ratio, which calculates the monthly debt you’ll incur from home expenses alone, such as loans and mortgage insurance.
Usually Lenders shall not exceed that ratio of 28%. for example, If your income is $4,000 per month. Even if you don’t have other responsibilities, you’ll have trouble getting approved for $1,720 in monthly housing expenses. For 28% of the front-end DTI, your housing costs should be less than $1,120.
If you have no other debts, why can’t you use your debt-to-income ratio? Because lenders don’t like you around. Financial misfortunes occur: you lose your job; Your car is totaled; A medical disability prevents you from working for a while. If your mortgage is 43% of your income, you have no wiggle room when you want to or to add extra expenses.
Most loans are long-term commitments. Remember, you can make those payments every month for the next 30 years. Therefore, you should evaluate the reliability of your main source of income. You should also consider your prospects for the future and the possibility that your expenses will rise over time.
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Getting approved for a mortgage up to a certain amount doesn’t mean you can actually afford the payments; So be honest about the level of financial risk you can comfortably live with.
It’s best to put 20% of your home price down to avoid paying private mortgage insurance (PMI). Usually included in your mortgage payments; PMI can add $30 to $70 to your monthly loan payment for every $30 to $70 you borrow.
There may be a few reasons why you don’t want to take 20% off your purchase. You don’t plan to stay at home for long; You may have long-term plans to turn the house into an investment; Or don’t want to risk saving that much money. If so, it’s still possible to buy a home without 20% down. For example, you can buy a home with an FHA loan with 3.5% down; But there are more bonuses to be had. In addition to avoiding PMI mentioned above; A bigger payment also means:
If you can afford a new home today, it doesn’t matter as much as you can afford a long-term trip.
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Although there are many benefits to a larger payment. Don’t completely abandon your emergency savings account to save more on your home. When unexpected repairs or other needs arise, you may find yourself stuck.
Assuming you have control over your money situation. Your next consideration is the housing-market economy — either in your current area or where you plan to move. A home is a valuable investment. Although it’s good to have money to make purchases. whether the acquisition makes sense from a financial perspective; do not answer
One way to do this is to answer the question, is it cheaper to rent than to buy? If buying is cheaper than renting, that’s a strong argument to buy.
Similarly, You should think about the long-term consequences of buying a home. Buying a house for generations is almost a guarantee to make money. Your grandparents bought a house 50 years ago for $20,000 and 30 years later could sell it for five or 10 times that amount. Although real estate has traditionally been considered a safe long-term investment, Recessions and other disasters can test that theory—and make would-be homeowners think twice.
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During the Great Depression, When the real estate market crashed in 2007, many homeowners lost money and many years later ended up owning homes for far less than they bought them for. If you buy real estate with the belief that it will increase in value over time. your mortgage; Factor property improvements and interest payment costs into your calculations.
Along those lines, property prices have been falling and there have been years of unusually high prices. If the prices are too low, it’s clear you’re getting a good deal. This can be taken as a sign that it might be a good time to make your purchase. In a buyer’s market; Depressed prices will put time on your side and increase your chances of your home increasing in value down the road. for example, If history repeats itself. We may see house prices fall due to the COVID-19 pandemic and its dramatic impact on the economy.
There are years when interest rates are high and years when they are low, which play a major role in determining the size of the monthly loan payment. for example, A 30-year loan (360 months) for a $100,000 loan at 3% interest will cost you $422 per month. With an interest rate of 5%, it would cost $537 per month. At 7% it jumps to $665. So if interest rates fall, it’s a good idea to wait before buying. If they rise, It makes sense to make your purchase sooner rather than later.
Seasons of the year can play a part in the decision-making process. Spring is probably the best time to shop if you want the widest variety of homes to choose from. Part of the reason has to do with the target audience of most homes: families who are waiting for their kids to move in until after the current school year, and who want to get settled in the fall before the new year begins.
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If you want low-traffic-price-friendly sellers: house-hunt in the fall (especially in colder climates) or the peak of summer for tropical states (before the season for your area, in other words). Inventory is likely to be small, so options may be limited, but sellers won’t see many offers this time of year.
However, Some savvy shoppers like to make offers around holidays like Christmas or Easter; unusual time It’s worth noting that the lack of competition and the spirit of the season as a whole is expected to pay off quickly at a reasonable price. .
Although money is an important consideration; Many other factors can play into your timing. A new baby on the way; Need extra space for an elderly relative who can’t live alone? Does the activity involve your children changing schools? Do you have to pay capital gains tax if you sell a home you’ve lived in for less than two years—so is it worth waiting to avoid the sting?
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