How to Know if you are Ready for Home Ownership
Q. We are ready to buy our first home, but don’t know where to get started. Can you help?
A. When you want to buy a home, it’s tempting to start the process by trolling real estate listings or going to open houses. This may be fun, but it isn’t the best place to start your homeownership journey. In fact, it can be a recipe for disappointment.
Before you do anything else, you need to determine if you can afford to make a mortgage payment. Buying a home is the most significant purchase that most people make. What’s more, most home loans are for 30 years. So it is essential that you end up with a payment that fits your budget.
A mortgage payment will include principle, interest, taxes and insurance. While a lender may tell you what you qualify for, only you can determine what you can afford. Only you know if you have higher- than-normal expenses because of unique circumstances in your life. When your budget gets squeezed, you cannot just stop paying a mortgage loan; if you do, you will lose your home and harm your credit. If a prospective payment is too high for your comfort level, then you need to look for a lower-cost home.
If you feel you can afford a mortgage payment, then your next step is to visit with a lender. If you have an account with a bank or credit union that offers mortgage loans, make an appointment here first. Explain that you want to see if you are credit-ready to buy a home and want to know how much home you can qualify for. Keep in mind this is only an estimate, as lender cannot give you any exact numbers until they have more specific information.
Ask about the current interest rate on the loan, and what the monthly payment on that loan would be. Ask, too, for an estimate on taxes and insurance, which have the potential to raise your payment to the point where you can’t afford the loan. Finally, get an estimate of your closing costs. Interest rates and closing costs vary from lender to lender, and all the initial numbers you get will be estimates that could change.
If the lender tells you that you are not credit ready, ask what steps you can take to change this. You may need to pay off or pay down your debt, or you may need to be at your job longer. Don’t view a “no” as a permanent answer. Instead, see it as “not ready yet,” but with a plan to be so in the near future.
If you are credit ready, do you have the cash on hand to close your loan? If not, now is the time to save for the closing costs.
If you decide to do your research online, rather than talking to a local lender, make sure you use a legitimate website. Many lenders have homeownership calculators on their websites. Never enter personal information on an unfamiliar website.
Once you start looking at homes, remember that you will need to consider other costs, too. Are there homeowner’s association fees? Is flood insurance required? What is the average gas and electric bill? Will you be traveling farther to get to work? If you are buying a fixer upper, how will you come up with the money to fix up the home?
The process of buying a home requires big-picture thinking and a willingness to be honest with yourself. Only you can know for certain how much you can truly afford to spend on your new home.
Bonnie Spain is the executive director of the American Center for Credit Education and Consumer Credit Counseling Service of the Black Hills. For more information, email firstname.lastname@example.org.
The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.