Buying a new home is a large commitment. It involves considerable financial planning before taking on such an expense.
Before you pull the trigger on this life-changing purchase, it is important to consider what type of home you can afford. Sometimes the exhilaration of buying your first house can get in the way of considering your finances. As a result, it is important to arm yourself with as much information as possible so you don’t overspend.
Here are some things you should consider to get ready financially before purchasing a home.
Understand Your Debt-to-Income Ratio
The most important consideration with buying any property is your savings and income. If you have enough cash on hand, you can consider buying a house right away. For most people this is not possible. Expert suggest that you can still buy a house if you qualify for a mortgage.
One thing to consider is how much mortgage you can afford. The Federal Housing Administration approves a 43% debt-to-income ratio as a general guideline. This ratio is used to determine if you will be able to pay your monthly payments on a mortgage. Mortgage lenders can be lenient or rigid depending on the housing market and their qualifying requirements.
It is important to understand what a 43% debt to income ratio means. It takes into account that all of your expenses don’t exceed 43% of your monthly income. These expenses include monthly payments, insurance, taxes, and all other home-related expenses.
If you earn $4000 per month, you can multiply this amount by 0.43 and determine that you can only spend around $1720 in debt payments to qualify for a mortgage. One important point you should know is that discrimination in mortgage lending is illegal.
If you feel like you have faced discrimination with your mortgage rates based on any reason, you can hold your service provider liable for damages.
What Mortgage Lenders Want to See
Another point of consideration is the front-end-debt-to-income ratio. This ratio calculates the amount of debt you would incur each month from your housing expenses. This includes things like mortgage insurance and mortgage payments.
Most vendors prefer this ratio to not exceed more than 28%. This means that if you earn $4000 a month, you would still have problems getting approval for $1720 in housing expenses. Even if you have no other debt obligations. For example, approval becomes much more likely if your costs are under $1120.
This is because lenders prefer clients who are a little more flexible with their money. There are many things that can go wrong financially. This includes losing your main source of income or emergency expenses can show up for anyone. It is not out of the ordinary to total your car or sustain a disease or injury that can prevent you from working.
This means that if your DTI is 43%, you have very little room to manage unforeseen expenses. Mortgages are a contract that can run for decades. It is important to remember that you may be making monthly payments to pay it off for the next 20-30 years. This is why you should consider the stability of your source of income. You should remember that your monthly expenses will inevitably rise over time.
Can You Afford The Down Payment?
One good rule to have is to invest 20% of the total price so you can avoid paying private mortgage insurance. PMI is usually added to your mortgage payments and can increase your monthly premium from $30 to $70 per month. And this is for every $100,000 borrowed.
There are many reasons why you may be unwilling to put the 20% down payment. This includes things like if you are not planning to stay at the property for long. Or if you plan to convert the house into an investment opportunity. Or you may just not want to put that kind of money down in one go. There are still ways you can get a house without putting down the 20%.
If you go for an FHA loan, you may be able to get a house for as low as a 3.5% down payment. There are, however, incentives if you can come up with more money. A larger down payment means significantly smaller monthly payments. Another benefit is you have more choices among lenders. Some lenders are hesitant to give you a mortgage unless you can put down a substantial down payment.
The Bottom Line
Buying a new home does not depend on if you can afford it today, but if you can handle future monthly payments. It all depends on you when you want to pull the trigger, and if you feel like you are financially stable enough to do so.
One thing that can help you alleviate the stress of debt is getting for life insurance. If you have a life insurance policy, your loved ones will be financially protected in case of your untimely death. This is because your life insurance will cover your mortgage or any other debts you leave behind.
Greg is co-founder and President of Dundas Life, a digital insurance brokerage that uses technology to make buying life insurance simple. Previously, he served as Director of Sales at a fintech firm where I took the company from no product to raising over $7M+ in funding and disrupting a 100-year-old industry.