Apr 13, 2023
Buying a home is the foundational element of living the traditional American dream. If you are considering making that large of a purchase, it is important to make sure you will be able to secure a reasonable interest rate and keep up with the mortgage payments. It is far better to wait and improve your financial standing than to rush into a situation that results in long-term problems.
It is easy to convince yourself that you will be able to handle the expenses and long-term commitment needed to buy a home. However, the decisions you make now will impact your finances for many years to come. It is worth it to take a hard look at your situation and examine the signs that could be indicating that now is not the right time to become a homeowner.
The first thing you should do before making any other steps towards homeownership is to check your credit rating. Your credit score will determine if you are eligible for a home loan and how much you may be willing to borrow. If your credit rating is not high enough to secure a mortgage, it means you do not have the income or financial stability to afford monthly payments. Look for ways to build up credit and increase your rating before pursuing a home mortgage.
If your monthly mortgage payment takes more than 30 percent of your monthly take-home pay, it will put your finances in a tight spot and leave you unable to attend to emergency circumstances. There are some exceptions to the 30 percent guideline, but financial experts advise that you spend no more than a third of your monthly income on mortgage payments.
You can have the best of intentions and think you are financially sound with a secure job, but life always seems to get in the way. Financial setbacks and money emergencies are inevitable. Financial planners generally agree that having the equivalent of at least a year’s worth of living expenses in a savings account earning interest is needed to guard against sudden job loss or unexpected expenses.
Being able to save some money from every paycheck, even if your savings account has reached your saving goal, is a sign that you have a stable cash flow with some level of long-term security. If you are unable to continue putting money away, you may need to wait to buy a home until you have a more stable cash flow.
Homebuyers that are unable to put down at least 20 percent of the total cost as a down payment are required to purchase private mortgage insurance (PMI) to protect the lender from nonpayment. Depending on your credit rating and the amount of your down payment, PMI can range from 0.5% to 1.50% of the loan, which can cost you thousands more every year. If you cannot afford to put down at least 20 percent of the cost as a down payment, you may need to reconsider while coming with ways to generate more income.
The worst thing that can happen to a homeowner is to lose the ability to make regular monthly payments on the mortgage. An upcoming wedding, job change, new baby, or other major expenses in your near future may force you to put off the purchase of a new home until you are able to make paying off your mortgage loan your top financial priority.
Buying and owning a home works best as a long-term investment. The majority of the payments you make in the first few years of the mortgage will go to paying off the interest on the loan. It takes time to break even on the purchase. If you think your career or personal circumstances will lead to a move in the next couple of years, it may be best to wait to buy a home until you are certain you can stay in a new home for at least several years.
Some debt is okay, but if you owe significant amounts of money to creditors, it may impede your ability to get a decent interest rate or be approved for a home loan at all. The types of loans you can get if you are carrying debt are likely to put you further into debt and create financial problems for years to come. Work on reducing your debt-to-income ratio before making serious preparations for homeownership.
Even if you can afford a substantial down payment and have the means to make monthly mortgage payments, there are other factors to consider before finalizing a deal. The following circumstances should give you pause regardless of the interest rate and terms of the loan.
Purchasing a home is the biggest investment your family will ever make. It is essential to determine whether it is the right long-term financial move for you. The realty professionals at SimpleShowing use years of industry experience to help you make the decisions that are best for your financial future. For complete information, contact SimpleShowing today.
It’s essential to lean on the guidance of a knowledgeable real estate agent. They can help you navigate the complexities of the house hunting process, and bring awareness to possible money pit issues like needing a new roof or high property tax. They will also help evaluate if the dream home purchase price fits comfortably within your budget and aligns with your ability to afford mortgage payments. An open house can be a charming event, but a professional pair of eyes from real estate agents can spot the issues that previous owners might have left behind.
Purchasing a home is one of the biggest financial decisions most people make in their lifetime, often compared to buying a new car or paying down existing debt. As such, it’s critical to calculate the monthly mortgage payment and compare it to your total monthly income, thus ensuring that the buying a house process doesn’t leave you financially strained. If the numbers don’t add up, it may be worth exploring other options, like saving money for a larger down payment, opting for a cheaper house, or considering an FHA loan.
The home buying process can indeed be overwhelming, but armed with the knowledge of these warning signs, you can avoid falling into a financial trap. Your mortgage lender is also a great resource to turn to for advice on how much house you can truly afford. Remember, the goal is not just to buy a house—it’s to secure a comfortable and financially sound future. Trust your instincts, take your time, and make a decision that supports your financial goals.